Small Business Taxes & Management^TM--Copyright 2011, A/N Group, Inc.

Introduction

The recently passed law extends a number of provisions to expiring tax law, changes some existing and extended provisions, and adds a number of new ones. We'll deal with the new law in several segments. The first, and probably the most important for most taxpayers is the one for individuals. Please note the dates carefully. Some provisions have been extended for one year; others for two. Two-year extensions may apply to 2010 and 2011 or to 2011 and 2012. Many of these changes require little or no explanation.

Payroll Tax Cut

This is one new provision in the law which will affect virtually every working individual. The new law reduces the employee OASDI (Social Security) tax rate under the FICA tax by two percentage points to 4.2 percent for one year (2011). Similarly, the provision reduces the OASDI tax rate under SECA (self-employment tax) by two percentage points to 10.4 percent for taxable years of individuals that begin in 2011. A similar reduction applies to the railroad retirement tax. The provision provides rules for coordination with deductions for employment taxes. The rate reduction is not taken into account in determining the SECA tax deduction allowed for determining the amount of the net earnings from self-employment for the tax year. Thus, the deduction for 2011 remains at 7.65 percent of self-employment income (determined without regard to the deduction). The income tax deduction allowed self-employed individuals for taxable years beginning in 2011 is computed at the rate of 59.6 percent of the OASDI tax paid, plus one half of the HI tax (Medicare portion) paid. Keep in mind the reduction only applies to the employee's portion. Thus, an employee making $90,000 annually will have an additional $1,800 (2% X $90,000) in after-tax cash.

Individual and Trust Tax Rates

This is probably the most important provision in the new law. It extends the 10%, 15%, 25%, 28%, 33%, and 35% rates for two years (through December 31, 2012). The brackets for 2011 are similar to those of 2010, but indexed for inflation. Without this change, tax rates and brackets would have change significantly and the 10% rate would have been eliminated entirely.

Itemized Deduction and Personal Exemption Limits

The new law extends the repeal of the limit on itemized deductions for individuals with adjusted gross income above the threshold through 2012. Likewise, the elimination of the phaseout of personal exemptions for high-income taxpayers is extended for two more years, through 2012.

Marriage Penalty Relief

The new law extends the marriage penalty relief by continuing the broader 15% tax bracket for married individuals and the larger standard deduction through the end of 2012.

Alternative Minimum Tax

The new law allows an individual to offset the entire regular tax liability and alternative minimum tax liability by the nonrefundable personal credits for 2010 and 2011. The provision also provides higher individual AMT exemption amounts for taxable years beginning in 2010 ($72,450 married joint; $47,450 for unmarried individuals; $36,225 for married separate) and 2011 ($74,450 married joint; $48,450 for unmarried individuals; $37,225 for married separate).

Sales Tax

You can once again elect to deduct sales tax instead of your income tax on Schedule A. This election was extended for two years, through the end of 2012.

Teacher's Expenses

For 2010 and 2011 teachers in elementary and secondary schools can take an above-the-line deduction for up to $250 of expenses paid or incurred for books, supplies, computer equipment and supplementary materials used by the eligible educator in the classroom.

Student Loan Interest

The new law extends the expanded deduction for student loan interest as an above-the-line deduction for two years, through 2012. Specifically, the rules that extended the deductibility of interest beyond the first 60 months and the higher income phaseout rules.

Coverdell Education Savings Accounts

The expanded rules for the Coverdell education savings account, including the higher dollar contribution limit ($2,000) and the wider range of qualified expenses has been extended for two years, through 2012.

American Opportunity Credit

The American Opportunity Tax Credit refers to modifications to the Hope credit that apply for taxable years beginning in 2009 or 2010. The maximum allowable modified credit is $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certificate program. The maximum credit is $2,500. For purposes of the modified credit, the definition of qualified tuition and related expenses is expanded to include course materials. Forty percent of a taxpayer's otherwise allowable modified credit is refundable (except in certain circumstances). The provision extends for two years, through 2012, the temporary modifications to the Hope credit.

Tuition and Fees Deduction

The law allows a maximum deduction of $4,000 for an tuition and fees associated with enrollment at an institution of higher education, but not for elementary or secondary education. This provision is phased out for taxpayers with income above the threshold AGI. The new law extends this provision for two years, through 2011.

Excludable Education Assistance

If certain requirements are satisfied, up to $5,250 annually of educational assistance provided by an employer to an employee is excludable from gross income for income tax purposes and from wages for employment tax purposes. This exclusion for employer-provided educational assistance was originally enacted on a temporary basis and was subsequently extended 10 times. While EGTRRA deleted the expiration date, the changes were subject to EGTRRA's sunset provision so the exclusion expired at the end of 2010. The new law extends this provision for two years, through 2012.

Federal Health Scholarships

The new law extends the gross income exclusion for certain federal and military medical scholarships through 2012.

Earned Income Tax Credit

The provision extends certain EITC provisions adopted by EGTRRA for two years through 2012. These include a simplified definition of earned income, a simplified relationship test, use of AGI instead of modified AGI, a simplified tie-breaking rule, additional math error authority for the IRS, a repeal of the prior-law provision that reduced an individual's EITC by the amount of his alternative minimum tax liability, and increases in the beginning and ending points of the credit phase-out for married taxpayers.

Child Tax Credit

The provision extends the $1,000 child tax credit and allows the child credit against the individual's regular income tax and AMT for two years, through 2012. The provision extends the earned income formula for determining the refundable child credit, with the earned income threshold of $3,000.

Child and Dependent Care Credit

The new law extends for two years, through 2012, the higher credit percentages and expense limits for the child and dependent care credit.

Adoption Credit and Excludable Assistance

The provision extends the EGTRRA expansion of these two benefits for one year, through 2012. Thus, for 2012, the maximum benefit is #12,170 (indexed for inflation after 2010). The adoption credit and exclusion are phased out ratably for taxpayers with modified adjusted gross income between $182,250 and $222,520 (indexed for inflation after 2010).

Charitable IRA Distributions

The new law extends for two years, through 2011, the exclusion of qualified charitable IRA distributions from gross income. This provision had expired at the end of 2009. The provision allows taxpayers to make a charitable contribution of all or a portion of an amount in an IRA, satisfying the required minimum distribution rules, without any portion of the distribution being included in taxable income. The new law also provides that a qualified charitable distribution of an IRA made in January 2011 is permitted to be treated as made in the taxpayer's 2010 taxable year and thus permitted to count against the 2010 $100,000 limitation on the exclusion, and also to be treated as made in the 2010 calendar year and thus permitted to be used to satisfy the taxpayer's minimum distribution requirement for 2010.

Charitable Conservation Contributions

The new law extends for two years, through 2011, the enhanced deduction for charitable contributions of real property for conservation purposes. This provision expired at the end of 2009.

Residential Energy Property Credit

Prior law provided a 30-percent credit for the purchase of qualified energy efficiency improvements to the envelope of existing homes. The law also provided a 30-percent credit for the purchase of qualified natural gas, propane, or oil furnace or hot water boilers, qualified energy efficient property, and advanced main air circulating fans. The new law extends the credits for one year, through 2011, but utilizes the credit structure and credit rates that existed prior to the enactment of the American Recovery and Reinvestment Act of 2009. The provision reinstates the rule that expenditures made from subsidized energy financing are not qualifying expenditures. Additionally, certain efficiency standards that were weakened in the American Recovery and Reinvestment Act are restored to their prior levels. Lastly, the provision provides that windows, skylights and doors that meet the Energy Star standards are qualified improvements. The provision applies to property placed in service after December 31, 2010.

Transportation Fringe Benefits

The new law extends the parity in qualified transportation fringe benefits for one year, through December 31, 2011. That means the exclusion for parking benefits and transit passes and van pool benefits remain at $230.

Federally Assisted Programs

Under this provision any tax refund received by an individual after December 31, 2009 begins a period of 12 months during which such refund may not be taken into account as a resource for purposes of determining the eligibility of such individual for benefits or assistance under any Federal program or any State or local program financed in whole or party with Federal funds. The provision terminates on December 31, 2012.

--Last Update 01/07/11