What's New

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. 

Individual Tax Relief
The following tax breaks for individuals (some of which expired at the end of 2009) have been retroactively reinstated by the Tax Relief Act and extended through 2011:

• The election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes.
• The above-the-line deduction for qualified higher education expenses.
• The $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary materials used by the educator in the classroom.
• The provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year. Individuals also will be allowed to make charitable transfers during January of 2011 and treat them as if made during 2010.
• The increase in the monthly exclusion for employer-provided transit and vanpool benefits to equal that of the exclusion for employer-provided parking benefits.
• The American Opportunity tax credit for higher education expenses. (Extended for two years)
• The provision allowing premiums for mortgage insurance to be deductible as qualified residence interest.

• $50 for each advanced main air circulating fan;
• $150 for each qualified natural gas, propane, or oil furnace or hot water boiler; and
• $300 for each item of energy-efficient building property (insulation, exterior windows and doors)

A taxpayer's maximum non-business energy property credit for all tax years is $500, no more than $200 of which may be for expenditures on windows. To apply the $500 lifetime limit the taxpayer must look back to any credits that were taken in 2006, 2007, 2009, and 2010. 

Business Tax Relief
On the business side, the following business tax breaks that expired at the end of 2009 have been retroactively reinstated and extended through 2011 by the Tax Relief Act:

• The research and development credit.
• 15-year write-offs for qualified leasehold improvements, and restaurant buildings (and certain improvements to such restaurant buildings).  
• The new markets tax credit.
• Expensing of environmental remediation costs.
• The enhanced deduction for contributions of food and book inventories, and computer equipment for educational purposes.
• A liberal rule for S corporations making charitable donations.
• Empowerment zone tax incentives.
• Renewal community tax incentives.
• Tax incentives for investments in the District of Columbia.
• The work opportunity credit (extended for four months (through the end of 2011)).
• The temporary exclusion of 100% of gain on the sale of certain small business stock.

In addition, the Act extended and expanded additional first-year depreciation. For investments placed in service after September 8, 2010 and through December 31, 2011 the new law provides for 100% additional first-year depreciation. In other words, the entire cost of qualifying property placed in service during that time frame can be written off, without limit.  Fifty percent additional first-year depreciation will apply again in 2012. As a reminder, the special bonus depreciation is not available on used property.

Payroll Tax Cut
Under the Act the payroll tax will be cut by two percentage points during 2011. The Social Security payroll tax on individual wages will be lowered to 4.2%, from the usual 6.2% rate. Self-employment taxes will be cut from 12.4% to 10.4%. The employer's share of Social Security tax is not affected; it stays at 6.2%.

Reinstatement of the Estate Tax and Reunification with Gift Tax
After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.

For gifts made after Dec. 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million.

We hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.