Back to School Tax Update

We thought with this year’s annual back-to-school tax update we would have more tax legislation to report on. But we have recently taken a back seat to our friends in the financial markets as they have no doubt bombarded you with their analyses of the battle over the debt ceiling, the downgrade of the U.S. credit rating by S&P and the resulting swings of the stock market. We have fielded questions, listened to concerns and with as much assurance as a CPA firm can muster up, we provide a sense of stability and calm. Feel free to call us.So, what tax-related bills has Congress passed recently?


Form 1099 Repeal-Remember one of the controversial provisions in the healthcare reform act that required businesses and other entities to file a Form 1099 when they make annual purchases aggregating $600 or more to a single vendor? Gone, in favor of eliminating the administrative burden the provision would have put on businesses.

Budget Control Act of 2011 -Also known as the debt ceiling bill, this legislation creates a 12-member bipartisan joint committee that will consider multiple tax proposals as part of its charge to reduce the deficit by at least $1.5 trillion over 10 years. There is no way of knowing what proposals will come to the surface. They will likely review the so-called “Gang of Six” proposals that would repeal the alternative minimum tax (AMT) altogether, reduce individual and corporate tax rates with a maximum somewhere between 23% and 29% and reform if not eliminate an unspecified number of tax deductions such as home mortgage interest, charitable contributions and certain medical expenses. They will also consider the Obama administration’s desire to let the so-called Bush tax cuts expire after 2012 for those with income over $200,000 ($250,000 for joint filers). We are told that nothing is off the table for this committee. We just wish they would hurry up so our clients can move on with more certainty.

So, where does this leave us for the REST OF 2011? Here are some things to remember:

Federal Individual Tax Rates-Same as 2010. Ranging from:

0% to 35% for ordinary income,
0% to 15% for long-term capital gains and qualified dividends.

Current law states that these rates will also stay the same for 2012. But who knows what might come out of the 12-person joint committee. See above.

Alternative Minimum Tax -The “patch” is in place that will keep many middle income taxpayers out of AMT’s grip. But, if you have high real estate tax deductions, high state income tax deductions or high miscellaneous itemized deductions, you might still be subject to it. The chances are high that if you paid AMT in 2010, you will pay it again in 2011. We can “run the numbers” to determine the impact on you if you like.

Depreciation-100% bonus depreciation is a nice provision available whereby most NEW business assets acquired before 2012 can be written off in their entirety this year. And Section 179 up front deductions remain available for acquisitions of USED business assets, up to $500,000 as long as additions don’t exceed $2 million.

Payroll Tax Cut -Hopefully employers and self-employeds have been properly taking into account the 2% payroll tax cut that is applicable in 2011 attributable to the employee’s share of Social Security. For those doing payroll in-house, take note of this benefit..

Estate and Gift Tax -We are well into the first year of the surprise estate and gift rules passed last December. 35% maximum tax rate with a $5 million unified gift and estate exemption. Also, the exemption is “portable” whereby if one spouse dies without using up his or her exemption amount, any unused amount will be tacked onto the surviving spouse’s exemption. However, these rates and the portability rule are only applicable through 2012. What happens after that is subject to election-year politics and unknown. Many prognosticators expect this current system to be extended, or else the exemption goes down to $1 million and the tax rate goes up to 55%. So, there is no need to rush your large gifts this year unless you planned to make them regardless of the tax system. Note that once you give away assets, so goes the future income and control. But future appreciation is also removed from your estate. None of this should prevent you from making the annual $13,000 per recipient gift which is subject to the annual exclusion and tax-free.

Extenders-The legislation at the end of 2010 extended through 2011 previously expired incentives, including the R&D credit, higher tuition deduction, teacher’s expense deduction, 15-year depreciable lives for certain real estate developments and tax-free distributions from IRAs for charitable purposes. In addition, certain business energy incentives were extended as well as a popular tax credit for certain energy efficient home improvements, though the latter credit is only $500 for 2011.

Small Business Stock Exclusion-Another extender was the 100% exclusion for gain on sales of certain small business stock put in place for stock acquired after September 27, 2010 and before January 1, 2011. This incentive has been extended for stock acquired in 2011. As a quick reminder, the stock has to be that of a C Corporation that is an active trade or business with assets of $50 million or less when issued. The stock must be held for more than five years. The exclusion is limited to the greater of $10 million or ten times the taxpayer’s basis in the stock.

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There have been less universal tax rulings and court cases that have come down this year. We will continue to monitor these and all tax legislation and be your resource should issues arise. In the meantime, if there are any provisions noted above for which you need more detail or if you have any questions, please let us know.