They Finally Did It! - Last Thursday Congress finally acted to address many tax issues we have been waiting for them to ‘fix’. Although this will help us answer your questions about what tax rates we expect for 2011 and 2012, as well as whether they were going to extend some temporary provisions that expired and were not available for 2010, we really cannot get too excited. We don’t see any of these changes that last more than two years. This means we are less than two years away from another year of uncertainty regarding tax rates.
Did you get our e-mail newsletter with this information? We sent an e-mail newsletter to customers for whom we have e-mail addresses. If you didn’t get one and would like to be included in these informative notices, please e-mail Bridgot in our office at bbyrum@cwccpas.com.
What this means for you We now know that the Bush era tax cuts have been extended for two years. Here are some planning ideas for you to consider during this window of time:
- Convert your traditional IRA into a Roth IRA. Although this creates additional taxes, you have the choice to either (1) pay the tax on the conversion when you file your 2010 return (April 15, 2011), or (2) pay half the tax on the conversion when you file your 2011 return (April 15, 2012), and the other half when you file your 2012 return (April 15, 2013). Since we know the tax rates are not increasing for 2011 and 2012, this is worth evaluating. New for 2010, is the income limits have been removed so that people at all income levels are eligible to make these conversions. We have more information on this in an article on our website: CWCcpas.com.
- For those over age 70½, you may contribute money from your IRA to a charity – and not report the distribution as income. Subject to a limitation of $100,000, you may make your charitable contributions through your IRA which could save you money in both federal and state taxes depending upon your situation. You have been given until January 31, 2011 to make 2010 contributions through your IRA.
- Long-Term Capital Gain rates now extended at the low rates of 0% and 15% through 2012. You can use this opportunity to sell appreciated property at lower tax rates. If you are holding stocks, you may want to sell some of them to recognize gains at these low rates, even if you repurchase those stocks to maintain your investment. If you sell property over a period of time where you are collecting installment payments, you may want to consider paying taxes on your gain in the year of sale, rather than waiting until the tax rates have increased.
- 2% tax holiday is a good time to boost your retirement contributions. Part of the tax changes passed in December 2010 is a reduction of employee FICA taxes from 6.2 % to 4.2% of earnings for 2011. This savings is also incorporated into the rate a self-employed person will pay. Beginning with your first paycheck in 2011, you should see this adjustment. We recommend you consider boosting your retirement contributions by this same 2% for 2011.
Other Changes we have seen this year you may need to know about:
- Adoption Credit increased to $13,170 and made refundable. For an adoption of a child with special needs, a $13,170 credit is allowed regardless of actual expenses. The credit allowable for a tax year is phased out for higher-income taxpayers. What is new for 2010 and 2011 is that this credit is refundable. In addition, carryover credits from prior years will be refundable for 2010! (For 2011, the expenses allowed for the credit are increased to $13,360.)
- Alternative Minimum Tax (AMT) patched. (Again.) We have been watching this closely for many years now. You are liable to pay the HIGHER of the tax calculated using the system we commonly work with, or the AMT. The AMT does affect over 4 million taxpayers, and would affect six or seven times as many people for 2010 and future years if Congress did not “patch” the law again. They did increase the exemption amount for 2010 and 2011, giving us some reprieve. Now we have another year before we worry about the next ‘patch’ they need to make!
- Child Tax Credits have been continued at the $1,000 level (was supposed to decrease to $500) for 2011 and 2012. In addition, they will continue to be refundable credits. This is good news for most families with children age 16 and under.
- College Tuition Credits in the form of the American Opportunity Tax Credit has been extended for 2011 and 2012. This credit generally allows for $2000 credit for the first $2,000 of college tuition expenses and $500 for the next $2,000 of college tuition for any of the first four years of college. For more information on this credit, view the article on our website at CWCcpas.com.
- Mileage rates for 2010 and 2011. Business use of a vehicle is deductible against business income. The IRS allow us to use a prorated share of actual expenses, or we may use a standard rate of 50 cents per mile for 2010. For 2011, the rate will increase to 51 cents per mile. In addition, use of your vehicle to obtain medical care is deductible as a medical expense at the per mile rate of 16.5 cents for 2010 and 19 cents for 2011. Use of your vehicle for charitable purposes is deductible at the rate of 14 cents.
- Self-Employed Health Insurance is deductible from Self-Employment tax for 2010 only. Usually it is deducible for income tax purposes, but not for Self-Employment taxes. In 2010 it is deductible for both.
- Small employer health insurance credit. Beginning in 2010, an eligible small employer (ESE) may claim a tax credit for non-elective contributions to purchase health insurance for its employees. An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full credit is available only to an employer with 10
- or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000.
- Landlords must issue 1099s for services over $600, like any other business. This is a heads-up for 2011 and later years. Any rental expense for services that are over $600 per year for a single payee must be reported on a 1099 unless the payee is a corporation or an exempt organization. We recommend that you have the payee complete a W-9 before you pay them!
- Businesses must issue 1099s for all payments after 2011. This is a one-year warning for what is coming. Businesses and Landlords must begin issuing 1099s for all business expenses, (not just services), that are over $600 to a single payee for all payments after 2011. Corporations are no longer exempted, and this includes purchases of property (merchandise, supplies, autos, equipment, etc.), not just payments for services. Many businesses need to start preparing by collecting W-9 forms for their vendors during 2011 so they are prepared for 2012. You may also want to consider supplying your Employer Identification Number (EIN) on your invoices or supplying a W-9 to each of your business customers early in 2012.
- Expensing Limits for business purchases expanded. Businesses can generally deduct most of their qualifying equipment purchases for 2010 and 2011 either through Section 179 deductions which allow them to expense up to $500,000 of purchases for 2010 and 2011, or through new ‘bonus depreciation’ for purchases from September 9, 2010 to December 31, 2011.
- State Unemployment Debts now collectable by IRS. People who owe Michigan or other states back unemployment may find that the IRS will help the states collect this money through federal tax refunds. December’s law change authorizes IRS to offset refunds to collect these funds on behalf of the states. If you file a joint return with a spouse who is liable for these payments, you may have to file a Form 8379, Injured Spouse Allocation in order to receive your portion of your tax refund.
- Estate Tax Changes. Congress, after years of anticipation, has finally addressed many uncertainties about the estate tax laws which were set to expire completely for the one year, 2010, then be reinstated on all decedent estates of over $1 million. They changed the exemption to $5 million, for years after 2010, the gift tax exemption is unified with the estate tax at the $5 million level also. In addition, for 2010, 2011, and 2012, they have lowered the top estate tax rate from 55% to 35%. There continues to be a lot of uncertainty in the future tax rates in this area and we recommend most people work with a qualified estate planning attorney to plan how they want their legacy and estate handled. Give us a call for attorneys we recommend.
This is only a sampling of the many changes we have seen from five significant tax laws passed in 2010. None of us have seen as many changes in the tax laws in a single year as we are dealing with this year. We will continue to prepare updates on specific topics and e-mail them to you. If you are not getting these notices and would like them, please e-mail bbyrum@cwccpas.com and request to be included.
Thank you for your business and your referrals. We hope you have a Merry Christmas and a Blessed New Year in 2011. Sincerely yours, The entire staff at Culver, Wood & Culver, CPAs
Comments
Post has no comments.