Article: Key Considerations for 2010 Personal Income Tax Returns
The following is provided for general information only. Please consult with us to determine how this information may apply to your personal income tax situation. Congress made many last minute tax law changes with the passage of the 2010 Tax Relief Act.
TAX RATES – The 2010 tax rates have been extended through 2012. The income tax rates for individuals will stay at 2010 rates with a top rate of 35% (instead of moving to a top rate of 39.6%). The 15% rate on long term capital gains and most dividends was extended through 2012. Special rates of 25% for gains on business or rental real estate to the extent of depreciation allowed and 28% for gain on collectibles are still in effect. The Alternative Minimum Tax "patch" was also extended through 2011.
DEDUCTION PHASEOUTS – The phase-out for itemized deductions and personal exemptions has been eliminated through 2012.
ESTATE PLANNING – The estate and generation-skipping taxes were fully repealed for 2010 only. The 2010 Tax Relief Act lowers estate and GST taxes for 2011 and 2012 by increasing the lifetime exclusion amount from $1 million to $5 million and reducing the top rate from 55% to 35%. The Act allows estates of 2010 decedents to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis or (2) no estate tax and modified carryover basis. For decedents dying in 2010, the due date for filing an estate tax return will be nine months after December 17, 2010. Effective for estates of 2011 decedents, the executor of a deceased spouse's estate may transfer any unused exemption to the surviving spouse.
GENERATION SKIPPING TAX – Although the GST tax is applicable in 2010, the GST tax rate for transfers made during 2010 is 0%. The GST tax rate for transfers made in 2011 and 2012 will be 35%. A trust created or funded during 2010 may also be allocated a GST exclusion amount of up to $5 million.
GIFTS – For gifts made after December 31, 2010, the $1 million lifetime gift tax exclusion has been reunified with the estate tax, with an exclusion amount of $5 million and a top estate and gift tax rate of 35%. Annual exclusions of present interest gifts from one donor to one donee are limited to $13,000 in 2010 & 2011. Note that Tennessee gift tax applies to gifts greater than the federal annual exclusion for lineal ancestors, descendents and siblings, and for gifts greater than $3,000 for all others.
BUSINESS INCENTIVES – A 100% depreciation deduction will be allowed for qualifying property placed in service after September 8, 2010 and by December 31, 2011. First-year bonus depreciation of 50% will apply to qualifying property placed in service in 2012. Many provisions that expired in 2009 were reinstated through 2011, including the research credit, the new markets tax credit, the employer wage credit for activated reservists, and the work opportunity tax credit.
CHARITABLE CONTRIBUTIONS – The 2010 Act also extended through 2011 the provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year. Additionally, individuals will be allowed to treat IRA transfers to charities during January 2011 as if made during 2010.
Temporary Employee/Self-Employed Payroll Tax Cut for 2011 – Under current law, employees pay a 6.2% Social Security tax on wages earned up to $106,800 (in 2011). Self-employed individuals pay 12.4% self-employment taxes on all their SE income up to the same threshold. For 2011, the 2010 Act gives a 2% payroll/self-employment tax holiday for employees and self-employeds. As a result, employees will pay 4.2% Social Security tax on wages and self-employeds will pay 10.4% Social Security self-employment taxes on self-employment income. The maximum savings for 2011 will be $2,136 (2% of $106,800). (The Medicare tax still applies to all wages and self-employment income).
FOREIGN ACTIVITY REPORTING – Anyone under U.S. jurisdiction with a financial interest in, or signature or authority over, a bank, securities or other financial account in a foreign country with a value exceeding $10,000 at any time during the year, must report the accounts on Form TD F 90‑22.1 by June 30th every year. Investments made in foreign entities may also be required to be reported in your individual tax return. There are substantial penalties for failing to report any of these items as required, so be sure to alert us immediately if you have any foreign activities.
FEDERAL TAX DEPOSITS – Form 8109 Tax Deposit coupons can no longer be used after December 31, 2010 and all businesses must register with EFTPS to make electronic tax deposits in 2011. Visit www.eftps.gov for more information.
OVER-THE-COUNTER MEDICINES – Beginning 2011, health flexible savings accounts (FSAs), health reimbursement accounts (HRAs), health savings accounts (HSAs) or Archer Medical Savings Accounts (MSAs) can no longer reimburse for the cost of over-the-counter medicines, unless the medicine is prescribed by a doctor. Penalties for using these accounts for disallowed purchases increased from 10% to 20% for HSAs and from 15% to 20% for MSAs.
RENTAL INFORMATION REPORTING – For rental property expense payments made after December 31, 2010, real property owners receiving rental income must provide information returns (Form 1099) to the IRS and service providers (such as plumbers, painters, or carpenters) for payments of $600 or more during the year. Therefore, rental property owners should request that all service providers sign and complete Form W-9 prior to issuing any payment to the service provider. Backup withholding of 28% may be required for payments to any service provider that fails to provide a signed Form W-9. Form W-9 may be downloaded from www.irs.gov.
ROTH IRA CONVERSIONS IN 2010 – Beginning in 2010, you may convert a traditional individual retirement account to a ROTH IRA account with no income limitation. For 2010 conversions only, one-half the conversion income will be taxed in 2011 and one-half in 2012. To report 100% of the income from the conversion in 2010, an election must be made with the 2010 tax return by April 15, 2011. Beginning with 2011, the conversion income will be taxed in the year of conversion.
KIDDIE TAX – Children under age 18 are taxed at their parents' rate on unearned income in excess of $1,900 in 2010, if that tax is higher than what the child would otherwise pay. Also, dependent children age 18 up to age 24, whose earned income is zero or less than 50% of their total support, will also pay tax at their parent's marginal rate.
ENERGY INCENTIVES – Tax credits are available for certain energy saving vehicles, including several hybrid models. There is a an energy tax credit for certain battery powered vehicles, ranging from $2,500 to $7,500 depending on the battery capacity, available for vehicles purchased through 2014. You may also be eligible for tax credits for certain home improvements installed during 2010 & 2011.
DEPRECIATION/VEHICLE DEDUCTIONS –The first-year Section 179 expense allowance for qualified property is $500,000 in 2010 and 2011, with a phase-out beginning for acquisitions in excess of $2,000,000 in 2010 and 2011. The maximum cap on depreciation of SUVs used for business is $25,000. The standard mileage rate is 50¢ for 2010 and 51¢ for 2011. The medical & moving rate is 16.5¢ per mile for 2010 and 19¢ for 2011. The charitable mileage rate remains at 14¢ for both years.
RETIREMENT CONTRIBUTIONS – IRA limit is $5,000 for both 2010 & 2011, with $1,000 more allowable for those over age 50. Deductibility may be limited by retirement plan participation and AGI limits. The 401(k) deferral limit is $16,500 for both years, with additional catch-up contributions for those over age 50 of $5,500. SIMPLE Plan limits are $11,500, with additional amounts for those over age 50 of $2,500. The limitation on annual additions to defined contribution plans is $49,000 for 2010 & 2011, with additional contributions allowed for those over 50 of $5,500 for both years.
SOCIAL SECURITY – The cap on wages subject to social security is $106,800 for 2010 & 2011. The Nanny tax threshold for paying FICA taxes on domestic employees is $1,700 in both 2010 & 2011. Schedule H is filed with Form 1040 to pay domestic employee taxes. Note that quarterly state unemployment tax reports may still be required on domestic employees.
CONSUMER USE TAX RETURNS – State use tax returns are due by January 20, 2011 for out-of-state purchases via catalogs or the internet upon which sales tax was not paid.