What the New Tax Law Means to You and Your Clients Business
Basic HR & Benefit Solutions
January 13, 2011
After months of uncertainty and partisan arguing, Congress passed a wide-ranging law that provides relief to taxpayers from all walks of life. On December 17, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
The new law solidifies many parts of the tax law that expired at the end of last year or were scheduled to
Business Tax Breaks
The new law also extends many other incentives for businesses involving energy, disasters and charitable contributions. For more information regarding your situation, consult with your tax adviser.
President Obama signing the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act on December 17, 2010 (White House photo)
IRS Gives Employers Guidance on 2011 Withholding
Employers must quickly get their payroll systems in line to account for the two percent cut in the Social Security tax for 2011. Congress passed the new law with just two weeks for employers to make changes.
Here is a rundown of the significant provisions affecting individuals in 2011 (see right-hand box for business tax breaks).
Lower tax rates for individuals will stay in place. For 2011 and 2012, the Tax Relief Act extends individual tax rates at 10, 15, 25, 33 and 35 percent. Without the new law, rates were scheduled to increase to 15, 28, 31, 36 and 39.6 percent.
A new payroll tax cut will be created for 2011. Most working Americans will get a raise in their 2011 paychecks as a result of the new law. Regardless of an individual's income, the employee share of the Social Security tax withheld from wages will drop from 6.2 percent to 4.2 percent up to the taxable wage ceiling of $106,800.
The extra amount employees will receive in their paychecks is expected to provide a boost to the economy. A single taxpayer making $50,000 a year will save approximately $1,000 in Social Security taxes. (The Social Security tax on self-employment income was also reduced by 2 percent.)
Favorable rates on capital gains and dividends remain. For 2010, long-term capital gains and qualified dividends are taxed at a maximum rate of 15 percent (zero percent for taxpayers in the lowest two brackets). The new law extends these low rates through December 31, 2012.
If Congress had not acted, the top rate on capital gains would have increased to 20 percent in 2011. Dividends could have been taxed at a rate of up to 39.6 percent
The estate tax comes back but at a more favorable exclusion amount and tax rate than expected. For 2011, the estate tax exclusion amount will be $5 million and the maximum estate tax rate will be 35 percent.
Background: A law passed in 2001 gradually increased the exclusion amount and decreased the maximum tax rate up until 2010, when the federal estate tax was repealed for one year only. In 2011, it was scheduled to come back with an exclusion of only $1 million and a maximum tax rate of 55 percent. So the new $5 million exclusion means that far fewer estates will be hit with estate tax.
The new law also makes changes to the gift tax, the generation skipping tax and the rules involving the tax basis of assets. We will detail these changes in future articles. In addition, the law provides new options for estates of individuals dying in 2010. Consult with your estate planning adviser because the new law has many implications.
The alternative minimum tax (AMT) patch is applied again. If Congress had not taken action, millions more individuals would have been forced to pay the AMT for 2010 and 2011. The two-year patch expands exemption amounts as follows:
- $72,450 for married joint-filing couples and surviving spouses for 2010 ($74,450 for 2011).
- $47,450 for single individuals for 2010 ($48,450 for 2011).
- $36,225 for married individuals who file separately ($37,225 for 2011).
Without the patch, the exemption amounts would have dropped to $45,000 for joint filers, $33,750 for singles and $22,500 for married individuals filing separately. Bigger exemptions mean less chance of being hit with the AMT.
The $1,000 child tax credit is extended. For qualified taxpayers, the $1,000 credit will be available through December 31, 2012. (It begins to phase out for taxpayers with adjusted gross income of $110,000 for joint filers and $75,000 for singles.) Without the new law, the child tax credit was scheduled to drop to $500.
A higher child and dependent care credit will still be available for two more years. If you have expenses for care of your under-age-13 children while you work, you may be eligible to collect a credit. The tax break is also available if you pay someone to care for an incapacitated dependent at home, such as a parent or spouse. The new law extends a higher credit for qualified taxpayers through December 31, 2012. For one dependent, the maximum credit is based on up to $3,000 of eligible care expenses. For two or more dependents, the credit base remains up to $6,000 of eligible expenses. The credit percentage ranges from a maximum of 35 percent to a minimum of 20 percent, depending on income.
Without the new law, the maximum credit base for 2011 would have dropped to $2,400 of eligible expenses for one dependent and $4,800 for two or more.
A better tax credit for higher education stays in place. There is good news for parents and students paying college tuition because the American Opportunity tax credit is now available through December 31, 2012.
Background: An earlier law renamed the Hope Education credit the American Opportunity credit, and made it more valuable for eligible taxpayers paying qualified higher education expenses. However, the American Opportunity credit was scheduled to expire at the end of 2010. Now it is extended for two more years. There are income limits. The credit begins to phase out for joint taxpayers when adjusted gross income reaches $160,000 ($80,000 for singles.)
A separate deduction for higher education tuition was also extended through 2011. However, you cannot claim the American Opportunity credit in the same year that you claim the tuition deduction. You must pick the most beneficial tax break in your situation.
The higher contribution amounts for Coverdell Education Accounts last another two years. An earlier tax law increased the amount you could put into a Coverdell Education Savings Account to $2,000 from $500. It also allowed the accounts to be tapped for elementary and secondary school expenses.
These tax benefits were scheduled to expire at the end of 2010. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act now extends them through December 31, 2012.
The "marriage penalty" is eased for another two years. Getting married can cause a couple's combined tax bill to be higher than when they were single. An earlier tax law eased the marriage penalty by tweaking tax brackets for married couples and giving them bigger standard deductions. But the fixes were scheduled to disappear after 2010.
The new law extends marriage penalty relief through December 31, 2012.
The tax credit for energy-efficient home improvements is extended another year. An earlier law established a credit for 30 percent of 2009 and 2010 expenditures on energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in U.S. residences. The maximum credit allowed for 2009 and 2010 combined is $1,500. The credit, under Internal Revenue Code Section 25C, was scheduled to expire at the end of 2010.
Under the new law, the energy-efficient home improvement credit is extended through December 31, 2011. However, the credit percentage is reduced to only 10 percent and the maximum credit is only $500 reduced by credits claimed in earlier years. Credits for certain items are subject to dollar limitations.
The itemized deduction and personal exemption "phase-out" rules for big earners are repealed for two more years. Before 2010, higher-income taxpayers had their itemized deductions and personal exemption write-offs phased out when they reached certain limits. This means that they didn't get the full benefit of the most popular itemized deductions such as mortgage interest, state and local taxes, charitable contributions, and miscellaneous deductions.
For 2010, the phase-out rules are gone but the rules were scheduled to reappear in 2011. The new law extends the repeal of these phase-out rules through December 31, 2012.
Unemployment benefits are extended for eligible individuals. Under the new law, emergency unemployment benefits will remain at their current level for 13 months.
Here are some other tax breaks for individuals that were extended under the new law:
- The annual tax-free employee benefit for up to $5,250 in employer-provided education assistance was extended through December 31, 2012. These assistance payments cover college and graduate school costs and the education does not need to be related to a taxpayer's job.
- The deduction for qualified mortgage insurance premiums on a qualified home is extended for one year, subject to some limitations.
- Favorable rules involving student loan interest deductions, worth up to $2,500, are extended through December 31, 2012. Without the new law, there was scheduled to be a 60-month limit on deductible interest, and a stricter phase-out provision that would reduce or eliminate the write-off for many more middle-income taxpayers.
- The state and local sales tax deduction expired at the end of 2009. It has now been extended through December 31, 2011. This allows individuals who pay little or no state income tax the option of claiming an alternative itemized deduction for state and local sales taxes.
- The charitable contribution of IRA proceeds is extended through the end of 2011. Under this provision, older owners of individual retirement accounts (IRAs) can give to charity in a different way. An IRA owner, age 70 1/2 or older, can directly transfer tax-free up to $100,000 per year to an eligible charity. To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts transferred are not taxable and no deduction is available for the transfer. However, amounts transferred to a charity are counted in determining whether the owner has met the IRA required minimum distribution rules for the year. Your tax adviser can provide more information.
- Also included in the new law was an extension through 2011 of the tax break for charitable gifts of appreciated property for conservation purposes.
- The deduction for elementary and secondary teachers who spend money on classroom supplies is extended through December 31, 2011. The write-off, of up to $250 for out-of-pocket expenses to buy materials such as books, supplies, computer hardware, software and other equipment, is available even if the teacher doesn't itemize deductions.
(This is just a brief description of some of the tax breaks included in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. We will provide a more detailed look of some of the new law's provisions in future articles. Consult with your tax adviser about your situation.)