Late 2010 law extends Bush-era tax rates for two years

After weeks of wrangling over the details, Congress passed a bill that will extend the tax rates in effect in 2010 through December 31, 2012. President Obama signed the "2010 Tax Relief Act" into law on December 17, 2010.

Here's an overview of the key provisions in the law:

* TAX RATES - The existing tax rates established in the 2001 and 2003 tax laws will continue for all taxpayers through 2012. This means the top tax rate for 2011 and 2012 will remain at 35% instead of reverting to 39.6%.

* CAPITAL GAINS AND DIVIDENDS - The top rate for dividends and long-term capital gains will remain at 15%. A 0% rate applies to taxpayers in the two lowest ordinary-income brackets.

* ITEMIZED DEDUCTIONS AND PERSONAL EXEMPTIONS - Higher-income taxpayers will not have their itemized deductions limited and their personal exemptions phased out.

* EDUCATION TAX BREAKS - The law extends through 2012 the American Opportunity Tax Credit, the income exclusion for up to $5,250 of employer-provided education assistance to employees, and the education savings account contribution limit of $2,000.

* ALTERNATIVE MINIMUM TAX (AMT) - The AMT was given another "patch" for 2010 and 2011, a move that will keep the tax from hitting millions more taxpayers. For 2010, the exemption amount is $47,450 for individuals and $72,450 for married couples filing joint returns.

* PAYROLL TAX CUT - For 2011, the employee rate for social security tax is cut from 6.2% to 4.2% on wages up to $106,800. Self-employed individuals will pay 10.4% on self-employment income up to $106,800. Employers will continue to pay 6.2% on employee wages. This payroll tax rate cut does not affect the Medicare portion of payroll taxes for either employees or employers.

* EXTENDERS - Effective for 2010 and 2011 returns taxpayers have the option of deducting state and local sales taxes instead of state and local income taxes. The deduction for up to $4,000 of higher education expenses and the deduction for teachers who buy classroom supplies are extended. Those aged 70½ or older may again contribute up to $100,000 tax-free
from an IRA to charity.

* BUSINESS PROVISIONS - The law extends the research tax credit for 2010 and 2011, and it extends the work opportunity tax credit through 2011. Bonus depreciation is increased from 50% to 100% for qualified business purchases made from September 9, 2010, through December 31, 2011. 50% bonus depreciation will be available in 2012.

* ESTATE TAX - The law restores the estate tax retroactive to January 1, 2010, and continues it through December 31, 2012. It establishes a top rate of 35% and an exclusion amount of $5 million ($10 million for married couples). Estates of persons who died in 2010 have the option of applying the estate tax and receiving a step-up in basis on property passing to heirs or having no estate tax but using a carryover of the decedent's basis in
property.

News from the IRS

Here's a quick update on recent IRS activities that
might affect you:

* 2011 MILEAGE RATES RELEASED - The IRS has released adjustments to the mileage rates that can be used for business driving, charitable driving, or driving for medical or moving purposes.  Effective January 1, 2011, the standard mileage rates for the use of a car, van, pickup, or panel truck will be 51 cents per mile for business miles, 19 cents for medical or moving purposes, and 14 cents for charitable driving. 

* NEW LAW DELAYS RETURN FILING - If you itemize deductions or claim any of three restored deductions (for state and local sales tax, higher education tuition, or educator expenses), you must wait until mid February to file your 2010 tax return.  The IRS must reprogram its computers to handle the changes made to these items by the "2010 Tax Relief Act" passed in late December. 

* IRS CHANGES FILING DEADLINE - This year the deadline for filing various tax returns normally due on April 15 is being changed to April 18, 2011.  The reason?  Washington, D.C. is observing its Emancipation Day holiday on April 15, and though that's not a national holiday, the Treasury Department has extended Tax Day 2011 to Monday, April 18.  The new deadline applies to individual and partnership tax returns, extension requests, and other tax deadlines such as making 2010 IRA and education savings account contributions, and making the first 2011 estimated tax payment. 

Save it or shred it? Some recordkeeping tips

 

Once you've filed your 2009 tax return, you may wonder
which records you should keep and which ones you can run
through the shredder. Here are a few suggestions.

 

If the IRS asks, you must be able to prove the validity of your tax return, which includes providing substantiation for each item reported on your tax return.

Here's a list of the most common records you need to keep.

* W2s, 1099s, and other records of income received.

* Receipts, cancelled checks, and other documentation
  for deductions taken.
* Written acknowledgments for charitable contributions.
* Records related to home improvements, sales, and
  refinances.
* Investment purchase and sales information, including
  brokerage statements.
* Records on IRAs and other retirement plans.

The IRS does not require that you keep your records in any particular way. The only requirement is that your records allow you and the IRS to determine your correct tax liability. So the key is to keep checks, receipts, and other records that document the income and deductions you've put on your tax return.

Wondering how long you need to keep these records? Keep tax records for as long as your return is subject to an IRS audit. Unless fraud, evasion, or a substantial understatement of income is involved, the IRS generally has only three years in which to question your return. Because of various combinations of the statute of limitations and technical provisions in the law, keep
records related to a specific tax return for seven years, rather than just for three years. If a record will affect future years, you may need to keep it even longer. And copies of tax returns should be kept permanently. 

For any assistance you need or questions you have about
recordkeeping, contact our office.

What's the status of health care reform?

While many of us were wrapping Christmas gifts or planning holiday gatherings this past Christmas Eve,

the Senate passed an $871 billion health care reform bill by a vote of 60 to 39. The "Patient Protection and

Affordable Care Act of 2009" would expand health insurance coverage to 94% of Americans and pay for it

with billions of dollars in new taxes and fees.

.

The House passed its version of health reform back in early November. Its bill, the "Affordable Health Care

for America Act," also extends coverage and pays for it with a different collection of taxes and fees from

those in the Senate bill. Both bills are massive and contain provisions that would affect individuals, businesses, and the medical

and insurance industries. A conference of members from

the House and Senate will be held in January to work

out the differences between the two bills and fashion

one piece of legislation. When that bill comes out of

conference, it must be passed by the House of

Representatives and the Senate before it can be sent to

the President to be signed into law.

Among the tax provisions in the Senate bill:

* A 40% excise tax on employer-provided health

insurance plans with annual premiums over $8,500 for

individuals and $23,000 for families. Somewhat higher

limit for retirees and those in high-risk professions

.

* A penalty excise tax on individuals who fail to

maintain health insurance coverage, starting at $95

in 2014 and increasing to $750 by 2016.

Among the tax provisions in the House bill:

* A 5.4% surtax on single taxpayers with incomes over

$500,000 and joint filers with incomes over $1 million.

* An additional tax levied on those who fail to obtain

health insurance coverage of either 2.5% of their

adjusted income or the average cost of insurance

premiums available on the new health care exchange.

Exemptions provided for lower-income individuals.

Both the Senate and the House bills provide individuals

and businesses with tax credits to help with the costs

of insurance. It's important to note that the provisions

in the final bill may differ significantly from those

in either of the current bills, so as you begin your tax

planning for 2010, remember that health reform and the

taxes connected with it are still a work in progress,

not a final law.

If you have any questions about this or any tax or accounting concerns don't ever hesitate to call our offices.

IRS Scam Emails May Put Your Info at Risk

I found this blog via taxgirl.com and thought I would pass along as some of our clients have encountered this before.

IRS Spammers

By now, you have to have received one of the scam emails purporting to be from the IRS with the subject line: "Notice of Underreported Income." I've received 59 of them just since September 18, 2009. Persistent little spammers.

But if you're smart or if you follow me on twitter (not that those things are mutually exclusive), you know that those emails are bad news.

The emails look like this:

The email encourages you to click on a link to view your tax statement. Don't do it. The links are associated with a number of viruses and malware, including Zeus Trojan. If your computer becomes infected with the Zeus Trojan, your personal and financial information may be at risk, with a specific focus on online banking.

How prevalent is Zeus Trojan? A recent investigation by a prominent computer security firm found that at least 55% of the computers that it searched were infected, despite anti-virus software on the computers. The group behind Zeus, thought to be located in Europe, has become more aggressive as it targets users.

How do you protect yourself and your information? Don't click on links or attachments in emails which purport to be from the IRS unless you requested the information. The IRS never begins investigations or contacts taxpayers with tax information unannounced via email. Never. Ever. Never.

Hit delete and don't look back.

Additional funding keeps "Cash for Clunkers" alive

Congress acted just before its August recess to keep a popular car trade-in program alive. The new Car Allowance Rebate System (CARS) -- formerly called the "cash for clunkers" program -- was extended on August 7 with an additional $2 billion injection of government funds. That means that your auto dealer is still prepared to give you a tax-free discount of up to $4,500 for replacing your current vehicle with a more fuel-efficient model.

But the CARS discount isn't available on all trade-ins. To qualify, you must meet certain requirements. For starters, any car that you're trading in must be a 1984 model or newer. Also, you must have owned, registered, and insured it for the year preceding the trade-in. (The insurance requirement doesn't apply in New Hampshire and Wisconsin.)

On the other side, the sticker price for the replacement car can't exceed $45,000. If your current car has a fuel economy of 18 miles per gallon or less, you must replace it with one with a rating of 22 miles per gallon or more. This entitles you to a discount of $3,500. The discount increases to $4,500 if the difference is ten miles per gallon or more.

This new break may be claimed if you buy the replacement car or you lease it for at least five years, but it's not available for used cars.

Similar subsidies are allowed for trade-ins involving SUVs, vans, and light trucks. For example, if the new vehicle is an SUV with a fuel economy of at least two miles per gallon higher than the trade-in, but less than five, the discount is $3,500. If it has a fuel economy of at least five miles per gallon more than the traded-in vehicle, the discount is $4,500.

How do you determine a vehicle's fuel economy? The government has established a website at www.cars.gov to answer this and other questions about the CARS program. The CARS program is subject to change due to the funding limits, so check this site as needed for updates.

Claim the 2009 homebuyer credit now or later

The IRS announced recently that taxpayers who qualify for the first-time homebuyer tax credit on a home purchased from January 1, 2009, through November 30, 2009, may claim the credit on either their 2008 income tax return due April 15, 2009, or on their 2009 tax return due April 15, 2010.

This option makes it possible for qualifying taxpayers to put money in their pockets in 2009, rather than
waiting until next year to benefit from this tax break. Note that you can amend an already-filed 2008 return to
claim the credit. Since the credit is "refundable," you may be eligible for a refund.

The first-time homebuyer tax credit provides a refundable credit of 10% of the home's purchase price, up to a maximum credit of $8,000 for couples filing joint returns ($4,000 if you're single or married filing separately). If you live in the home for at
least three years, the credit does not have to be repaid. Income limits apply, with phase-out of the credit starting at $75,000 for single taxpayers and $150,000 for married couples filing jointly.

For first homes purchased from April 9, 2008, through December 31, 2008, a credit of up to $7,500 is
available to qualifying taxpayers. This credit can only be taken on a 2008 tax return, and it must be repaid in
15 equal installments beginning with the 2010 tax year. If you have bought or will be purchasing a home this year give us a call or an email us to see if you quality for the tax credit.