The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) signed by the President on December 17, 2010 extended the tax cuts implemented in 2001 and 2003 for another two years. This legislation also provides significant estate tax relief and includes a two-year "patch" to the onerous Alternative Minimum Tax (AMT). It also contains important new tax breaks for businesses and individuals as well as the extention of several other provisions benefiting them.
This refundable credit for qualified individuals was introduced last year and continues for 2010. It is based on the lesser of 6.2% of an individual's earned income or $400 ($800for a joint return). The 2010 withholding tables have reflected this tax savings for each employee throughout the year.
For 2011, this credit will be replaced by a 2% reduction of Social Security tax charged to employees and self-employed individuals. Employees will pay only 4.2% Social Security tax on wages and self-employed individuals will pay only 10.4% Social Security self-employment taxes on that income up to the threshold. The maximum savings here would be $2,136.
c) Capital Gains and Qualified Dividends
Long-term capital gains and qualified dividends are taxed at a maximum of 15%, even though you are in a 25% or higher tax bracket. However, for those taxpayers whose taxable income puts them in the 10% or 15% tax bracket, there is no tax on this income!
This provision which was scheduled to expire after this year has been extended through December 31, 2012 by the 2010 Tax Relief Act.
d) Itemized Deductions and Personal Exemptions
There will be no phase out of your itemized deductions nor your $3,650 exemption(s) when reaching higher adjusted income levels. The 2010 Tax Relief Act has extended this provision to be in place for the 2011 and 2012 tax years as well.
e) Sales Taxes
You can still elect to deduct general sales taxes instead of state and local income taxes. Use your receipts or the applicable IRS table amount. The sales tax on major purchase items can be used to augment the IRS table amount. This provision was retroactively reinstated for 2010 and will be in place through December 31, 2011.
f) Individual Retirement Accounts (IRAs)
Joint taxpayers can make deductible IRA contributions of $5,000 each, even if one spouse has little or no income, subject to limitations to include one or both spouses covered by an employer retirement plan. If you are age 50 or older, there is a $1,000 contribution catch-up provision that allows you to contribute more than the normal limit to your IRA.
As with the traditional IRA, you must have earnings to contribute to a Roth IRA. Roth IRA contributions are not deductible. From an economic and long-term tax standpoint, you might do well considering a Roth IRA over a traditional IRA. Not only will the earnings accumulate tax-free, the distributions are also not subject to tax.
The modified AGI limit on converting IRAs and qualified retirement plans to Roth IRA status has been eliminated. The income resulting from a conversion to Roth status in 2010 is to be reported equally in each of the subsequent two tax years, 2011 and 2012. This forward spread of income for two years is available only for 2010 conversions. The continuation of current tax rates provided by the 2010 Tax Relief Act should make it more difficult to justfy opting out and paying the tax on your 2010 return. The decision to convert is somewhat complex as there are several factors involved. You should obtain help from a qualified professional before moving any money.
g) Education Tax Incentives
1. The American Opportunity Credit is a temporary two-year expansion of the Hope Credit which was implemented last year and continues for 2010. The maximum credit is $2,500 per student per year. It is based on 100% of the first $2,000 of qualified higher education expenses and 25% of the next $2,000. The credit is allowed for the first four years of the student's post-secondary education in a degree or certificate program. 40% of the credit is refundable. The definition of qualified higher education expense was expanded to include course materials. This credit is phased out for joint filers with AGI between $160,000 and $180,000 and single filers with AGI between $80,000 and $90,000..
2. A Lifetime Learning Credit can be used for qualifying tuition and expenses for courses to acquire or improve job skills, as well as for undergraduate and graduate level courses at an eligible education institution. The credit is 20% of up to $10,000 of expenses (maximum credit of $2,000 per return.) This credit is phased out for joint filers with AGI between $100,000 and $120,000 and single filers with AGI between $50,000 and $60,000.
3. Interest, up to $2,500, paid during the year on any qualified education loan, may be deducted from gross income in arriving at adjusted gross income. The deduction, supported by Form 1098-E, is phased out for single filers with AGI from $60,000 to $75,000 and joint filers with AGI from $120,000 to $150,000.
4. A $2,000 nondeductible contribution to a Education Savings Account is available to help beneficiaries (under age 18) save for education expenses. Distributions may be taken from this account tax free if used for qualified elementary and secondary education expenses in addition to higher education expenses.
h) Charitable Contributions
All cash contributions of $250 or more in any one day must be supported by a written acknowledgment from the charity indicating its name, date of contribution, and amount, plus a statement as to whether the donor received any goods and services(with a good faith estimate of value) in connection with the donation.. For contributions under $250, you must have either written substantiation from the charity or a bank record for support.
The provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to a qualified charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per year was retroactively reinstated by the 2010 Tax Relief Act and extended through December 31, 2011. Individuals will be allowed to treat IRA transfers to charities during January 2011 as if made during 2010.
i) Mileage Rates
The standard business mileage rate was revised to 50 cents per mile for the year. Charity mileage remains at 14 cents per mile. Medical and moving mileage was changed to 16.5 cents per mile for the year.
j) Earned Income Credit
There are increases to the Earned Income Credit for low income workers with dependent children who meet specific criteria. The maximum credit for those with one qualified child is $3,050, with two qualified children it is $5,036 and with more than two it is $5,666. In addition, there is a maximum credit of $457 extended to include low income workers ages 25-65 with no qualifying children.
k) "Kiddie Tax"
The "Kiddie Tax" on unearned income (interest, dividends, etc...) includes those who are 18 on the last day of the year or are a full time student from age 19-23. Dependent children must file a return if this type of unearned income is over $950. If unearned income exceeds $1,900, the excess is taxed at the parent's rate.
l) Federal Estate Tax
The 2010 Tax Relief Act lowered Federal estate taxes for 2011 and 2012 by increasing the applicable exclusion amount from $1 million to $5 million and reducing the top rate from 55% to 35%. It also provided a step-up in basis for beneficiaries. The estates of those dying in 2010 are retroactively subject to these revised provisions as well, but they can opt out by filing a special election on or before September 30, 2011.
m) Landlord Form 1099 Filing Requirements
Beginning January 1, 2011, as a landlord you must file Form 1099 for everyone from whom you buy goods and services! Each form which is filed at year-end requires name, address, and taxpayer ID number. As you pay your bills, you need to furnish these people a W-9 form to be returned with their pertinent information.
The State income tax rate continues to be 4.35% for 2010. With the income tax rate changing to 4.25% on October 1, 2011, the annualized rate for 2011 will be 4.33%.
The personal exemption allowance was not changed, remaining at $3,600. In addition, there is a special $600 exemption for each child younger than 19 years of age on December 31, 2010 claimed on your return.
A refundable credit for qualified home improvements and/or energy efficient appliances was made available to homeowners last year and continues for 2010 and 2011. The credit is based on 10% of the purchase price up to $150 for a joint return with an AGI of $75,000 or less or up to $75 for a single return with an AGI of $37,500 or less.
For your 2010 State return, the TAXABLE VALUE of your personal residence needs to be displayed on your Homestead Property Tax Credit form. The property tax amount must be from your 2010 tax bills regardless of when paid, exclusive of any special assessments. Transmitting your return without this information, would only delay your refund.
The maximum subtraction for interest, dividends and capital gains income for senior citizens not taking a pension deduction is $10,058 for a single person and $20,115 for a joint return.
If you purchased a Michigan Education Trust (MET) contract during 2010, you may deduct the total contract price (including processing fee). Contributions made to the Michigan Education Savings Program (MESP) on or before December 31, 2010 are deductable not to exceed $5,000 for single filers or $10,000 for joint filers.
Many of you are taking advantage of our drop off or mail-in service. We would like to encourage this as a means to make the tax preparation process more efficient for all of us.