ELECTRONIC FILING
Effective January 1, 2011, Federal law requires virtually all paid tax return preparers to electronically file income tax returns. Electronic filing has been in use since 1990 and has proven to be a secure and efficient means of filing. Electronic filing provides quick proof that your tax return has been accepted by IRS, and refunds are usually processed in half the time and even quicker if direct deposit is elected. Even if you owe money, you can file now and postpone payment until April 15.
According to government statistics, nearly 100,000,000 tax returns, or about 70% of those filed, were e-filed in 2010. Over 90% of the returns we prepared last year were e-filed.
Internal Revenue Service has established procedures for clients who choose not to electronically file. Please contact us if you have any questions or concerns regarding electronic filing.
Again, this year as a courtesy to our clients, electronic filing services will be provided free of charge.
AN OVERVIEW OF SIGNIFICANT CHANGES – 2010
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, called the most sweeping tax law in a decade, is much more than just an extension of the Bush-era tax cuts. Among the most valuable tax breaks for individuals are the extension of tax rate reductions and the payroll tax cut. Both deliver immediate tax savings starting in January, 2011. Following are highlights of some of the key incentives in the new law.
INDIVIDUALS
Tax rates: The new law extends the 10, 15, 25, 28, 33, and 35 percent individual tax rates for two years, through December 31, 2012.
Itemized Deduction Limitations, Exemption Phase-out and Marriage Penalty: The new law also extends full repeal of the limitation on itemized deductions and the personal exemption phase-out for two years. Married couples filing jointly will also benefit from extended provisions designed to ameliorate the so-called marriage penalty.
Payroll tax cut: Effective for calendar year 2011, the employee share of the OASDI portion of Social Security taxes is reduced from 6.2% to 4.2%. Self-employed individuals also benefit, paying 10.4% instead of 12.4% on self-employment income. The payroll cut replaces the Making Work Pay credit. The payroll tax cut has the potential of significantly higher benefits with a maximum payroll tax reduction of $2,136 as compared to a maximum available $800 Making Work Pay credit for married couples filing jointly ($400 for single individuals).
Capital gains/dividends: The new law also extends reduced capital gains and dividend tax rates expiring after 2012, unless Congress intervenes. For 2011 and 2012, individuals in the 10% and 15% rate brackets can take advantage of a zero percent capital gains and dividend tax rate. Individuals in higher rate brackets will enjoy a maximum tax rate of 15% on capital gains, as opposed to a 20% rate that had been scheduled to replace it and with dividends taxed at ordinary income tax rates.
AMT patch: Because of the way the AMT is structured, many times encroaching on middle income taxpayers, Congress has routinely enacted so-called “AMT patches.” The new law continues this trend by providing higher exemption amounts and other targeted relief.
Education: The American Opportunity credit, the expanded version of the Hope scholarship credit, is extended through 2012. The above-the-line deduction for qualified tuition and related expenses is extended through 2011. Expansion of the student loan interest deduction is extended for two years, 2011 and 2012.
Residential energy property credit: A modified version of the residential energy property credit is extended for one year, through 2011. While the new law extends the credit, at reduced benefit, it also adds complexity by reinstating the rules for the credit in place before 2009.
More incentives: Along with all these incentives, the new law extends many popular but temporary tax breaks. Extended for 2011 and 2012 are 1) $1,000 child tax credit, 2) enhanced earned income tax credit, 3) adoption credit with modifications, 4) dependent care credit and 5) deduction for certain mortgage insurance premiums.
The new law also extends retroactively some other valuable tax incentives for individuals that expired at the end of 2009. These incentives are extended for 2010 and 2011 and include 1) state and local sales tax deduction, 2) teacher’s classroom expense deduction, 3) charitable contributions of IRA proceeds and 4) charitable contributions of appreciated property for conservation purposes.
BUSINESSES
Bonus depreciation: Businesses can use bonus depreciation to immediately write off a percentage of the cost of depreciable property. The new law makes 100% bonus depreciation available for qualified investments made after September 8, 2010 and before January 1, 2012. It also continues bonus depreciation, albeit at 50%, on property placed in service after December 31, 2011 and before January 1, 2013. There are special rules for certain longer-lived and transportation property. Additionally, certain taxpayers may claim refundable credits in lieu of bonus depreciation.
Code Sec. 179 expensing: The new law provides for enhanced Code Sec. 179 expensing for 2012. Code Sec. 179 dollar and investment limits are $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The new law provides for a $125,000 dollar limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) for tax years beginning in 2012 (but not after).
More incentives. Other valuable business incentives in the new law include extensions of 1) 100% exclusion of gain from qualified small business stock, 2) transit benefits parity, 3) Work Opportunity Tax Credit (with modification), 4) New Markets Tax Credit (with modification), 5) differential wage credit, 6) Brownfield remediation, 7) active financing exception/look-through treatment for CSCs. 8) tax incentives for empowerment zones, 9) special rules for charitable deductions by corporations and other businesses, and more.
Energy: For businesses, one of the most valuable energy incentives is the Code Sec. 1603 cash grant in lieu of a tax credit program. This incentive encourages the development of alternative energy sources, such as wind energy. Other business energy incentives extended by the new law include excise tax and other credits for alternative fuels, percentage depletion for oil and gas from marginal wells, and other targeted incentives.
ESTATE
The new law revives the estate tax, but with a maximum estate tax rate of 35% with a $5 million exclusion. The revived estate tax is in place for decedents dying in 2011 and 2012. The new law gives estates the option to elect to apply the estate tax at the 35%/$5 million levels for 2010 or to apply carryover basis for 2010. The new law also allows “portability” between spouses of the maximum exclusion and extends some other taxpayer-friendly provisions originally enacted in 2001.
