The Tax Relief Act was signed on December 17, 2010. As a result of the late passage, some taxpayers planning to file their 2010 tax returns early have been advised by IRS to cool their heels and wait until mid- to late-February, 2011. Affected taxpayers are those planning to file Schedule A, or claim above-the-line deductions for higher-education tuition and fees or educator expenses. While we will still be able to prepare the tax return, we will not be able to electronically file it until the IRS computers are reprogrammed to reflect the 2010 Tax Relief Act’s changes.
The Tax Relief Act extends, renews or enhances a large number of individual tax incentives, among the most far reaching being reduced individual income tax rates and an across-the board payroll tax cut for 2011. This letter highlights the key individual tax incentives in the new law. As always, please contact our office for more details.
Individual tax rates Reduced individual tax rates put in place in 2001 were scheduled to expire after 2010. The new law extends the reduced rates for two years. The current rate brackets (10, 15, 25, 28, 33 and 35 percent) remain unchanged for 2011 and 2012. The new law also extends full repeal of the itemized deduction limitation and full repeal of the personal exemption phase-out, both scheduled to expire after 2010, for two years.
AMT relief Along with extending these rate cuts, the new law targets relief to taxpayers facing the alternative minimum tax (AMT). Because the AMT is not indexed for inflation, and for other reasons, the tax steadily encroaches on middle income taxpayers. The new law stops this encroachment by giving individuals higher exemption amounts and providing other targeted relief. The reach of the AMT often surprises individuals.
Payroll tax cut Effective for calendar year 2011, the new law reduces the employee-share from 6.2 percent to 4.2 percent up to the taxable maximum. The employer-share remains unchanged. Self-employed individuals will pay 10.4 percent on self-employment income up to the taxable maximum. The reduction has no effect on an individual’s future Social Security benefits.
Capital gains/dividends In 2003, Congress set new maximum tax rates for qualified capital gains and dividends but, like the individual rate cuts, these taxpayer-friendly rates were temporary. For 2010, the maximum tax rate is 15 percent (zero percent for individuals in the 10 and 15 percent tax brackets). The new law extends these rates for two years, through December 31, 2012. In a related development, the new law extends the temporary 100 percent exclusion of gain on certain small business stock.
Child tax credit Many individuals enjoy the benefit of the $1,000 per child tax credit. Without the new law, the child tax credit would have dropped to $500 for 2011. The new law extends the $1,000 credit and keeps the refundability threshold at $3,000 for 2011 and 2012. In related developments, the new law also extends some enhancements to the earned income tax credit and the adoption credit for two years.
Estate tax Under the new law, the federal estate tax will again apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply. This election, and many of the other estate tax provisions in the new law, is very technical. Besides the estate tax, there are provisions in the new law extending and modifying the federal gift tax and the federal generation skipping transfer (GST) tax.
Education A variety of tax incentives are available to help save for and finance education costs. Like so many incentives, they are temporary. The new law extends some of the most popular education tax incentives like the American Opportunity Tax Credit, the tuition deduction, and the student loan interest deduction.
More incentives The new law extends many valuable but temporary tax incentives for individuals. They include the state and local sales tax deduction, the teacher’s classroom expense deduction, and special rules for individuals who contribute IRA proceeds to charity. Keep in mind that not all of the expired temporary individual tax incentives were extended. Among the incentives not extended are the additional standard deduction for real property taxes, the $2,400 exclusion for unemployment benefits, the first-time homebuyer tax credit, COBRA premium assistance, and some others. If you have any questions about which incentives were extended, please contact our office.
REMINDER ABOUT POLICY CHANGES DUE TO IRS CRACKDOWN!!
The IRS believes that taxpayers are not paying all the taxes they owe. The difference between the amount everyone pays and amount the IRS wishes that everyone would pay is called the “Tax Gap.” In an effort to get some of this money, the IRS is cracking down on everyone. The national audit rate is higher than it has been in over ten years! Here are some specific danger areas and ways we can work together to avoid them:
“SAME AS LAST YEAR” NOT GONNA FLY:
Some of you (you know who you are!) always tell us that your expenses are “the same as last year.” Just to give you fair warning, this is not going to work. If your expenses actually were very similar to last year’s expenses, please do your tax preparer a favor and take the time to look over your last year’s tax return and verify these amounts. If you don’t make some effort to keep track of your records and expenses, don’t be surprised if your tax preparer politely tells you to go over your records and come back when you are ready. We love all of you, but none of us at Bailey & Thompson want to pay $1,000 in fines to help you make up numbers on your taxes. “Guesstimations” are one thing, and if it’s reasonable, we’ll always try to take your word for it. But if someone is going to expect us to make up numbers for them—we recommend TurboTax. J
EARNED INCOME CREDIT:
According to the IRS, the Earned Income Tax Credit (EIC) is one of the most abused tax credits in existence. Because of this, the IRS is requiring that tax preparers “go the extra mile” verifying your tax information, if you get the Earned Income Credit. Please don’t be surprised or offended if your tax preparer asks you some frank questions concerning your dependents or self-employed income this year. Your answers are between you and God. J Our questions, however, are required to avoid nasty penalties for you and us, the tax preparers! Thanks for understanding.
APRIL 10th - WE NEED YOUR PERSONAL TAX RETURN INFORMTION
In order to allow adequate time to prepare your tax return, we need your tax return information in our office before April 10th (in the case of corporations, March 1st). This is to make sure that your return is not hurried or rushed leading up to the deadline. For returns received on or after April 10th, an extension will probably be necessary.
CONTACT US FOR EXTENSION:
If you are unable to have your tax documents together and to our office before April 10th, we are happy to file an extension to file your tax return. Please note that we do not automatically file extensions if we don’t hear from you. You need to contact our office if you need for us to file an extension for you. Also, please be aware that an extension is an extension to file your tax return NOT an extension of time to pay any balance of tax that you may owe. If you feel you may owe tax, you need to be prepared to make a tax payment when filing the extension.
For your convenience, we would be happy to email, fax, or mail you a copy of your tax organizer. Your tax organizer includes tax information you reported last year which will help you gather the necessary documents for 2010.
As we strive to serve you better and make this the best year ever, we invite you to contact us at your earliest convenience to set an appointment. Also, should you have any questions or need directions to our office, please do not hesitate to call us at (501) 562-7679 or email us at tax@baileythompson.com.
