Uncertainty Regarding Tax Law Changes in 2011 - What Taxpayers Should Be Aware of09/10/2010 | Fall 2010 Newsletter
As 2010 draws to a close, tax planners and their clients are faced with uncertainty — will the so-called “Bush Era Tax Cuts” be allowed to expire on December 31st? If they are allowed to expire, most taxpayers will be faced with an increased tax burden beginning in 2011.
All told, there are some 70 federal tax provisions that are scheduled to expire. Principal among the changes that will take place if Congress does not act before the year end are:
- The current income tax rates of 10%, 15%, 25%, 28%, 33% and 35% will be replaced and increased to rates of 15%, 25%, 28%, 36% and 39.6%.
- The income tax rate at which most taxpayers pay income tax on long term capital gains will increase from 15% to 20%.
- Dividend income will be taxed at ordinary income tax rates.
- The gift tax rate will increase from the current 35% rate on cumulative taxable gifts which exceed $1 million to a rate which will be determined using the unified transfer tax rate schedule.
- The estate tax rate will be determined using the same unified transfer rate schedule, with the result that cumulative taxable transfers made by a taxpayer, whether made as a gift during his or her lifetime (in excess of the permitted annual exclusion) or which occur as a result of their death, which exceed $1 million, will be taxed on a graduated rate schedule beginning at 41%, increasing to 50% for cumulative transfers made in excess of $2.5 million. (Cumulative transfers of less than $1 million, while technically taxed, are protected by the application of a unified credit). In addition, the estates of the very wealthy will again be subject to a 5% surcharge.
- The carryover basis rules permitting executors to increase the tax basis of property inherited by up to $1.3 million will end. Taxpayers who inherit property from a decedent will be required to use the value of the property on the decedent’s date of death (or on the alternative valuation date if the executor elects to use such date for purposes of valuing the assets owned by the decedent for federal estate tax purposes) as their basis for determining gain or loss or computing depreciation, regardless of what the decedent’s tax basis may have been.
- The American Opportunity Tax Credit, which allows qualifying individuals who attend college to claim a tax credit of up to $2,500 for the cost of tuition and related expenses, will end.
- The dollar limit on expenses qualifying for the dependent care credit will be reduced from $3,000 to $2,400, and the applicable credit percentage will be reduced from 35% to 30%.
- The Nonbusiness Energy Property Credit, which allows individuals to claim a non-refundable credit on qualified energy efficiency improvements made to a taxpayer’s principal residence, will end.
- The exclusion from gross income for individuals on account of services rendered as a member of a qualified volunteer emergency response organization will be eliminated.
Congress has recently addressed certain provisions that otherwise would have been eliminated.
- The exclusion of gain resulting from the sale of qualified small business stock held for more than five years acquired between February 18, 2009 and December 31, 2010 was scheduled to be reduced from 75% to 50%. Under the Small Business Jobs Act of 2010, taxpayers will able to exclude 100% of the gains realized on qualified small business stock acquired after the date of the enactment of the act, September 27, 2010, and before January 1, 2011. Whether this provision actually serves to benefit many taxpayers remains to be seen.
- In 2010 and 2011, taxpayers will be able to claim a current deduction under Section 179 of the Internal Revenue Code for up to $500,000 of qualifying property. This amount had been $250,000 for 2010 and was scheduled to be reduced to $25,000 beginning in 2011. The definition of qualifying property has also been modified to include qualified real property such as leasehold improvements subject to a $250,000 limitation.
Congress has enacted other legislation which taxpayers must be aware of.
- Buried in the 2,409 page Health Care bill is a requirement that all businesses send a Form 1099 to every company or individual from which they purchased more than $600 of goods and services.
Cautionary Note — Congress and the Admin-istration are currently attempting to reach a compromise which may result in some or all of the Bush Era Tax Cuts being extended, albeit for a limited period of time.