(1) The “Bush” tax cuts have been extended through December 31, 2012, avoiding a massive tax increase for probably every single American taxpayer. This means –
• The individual tax rates remain at 10%, 15%, 25%, 33% and 35% for the next two years, and so does the special capital gain rates of 0% and 15% for qualified dividends and long-term capital gains.
• “PEP and Pease” – what I have dubbed the “read my lips” taxes – are gone. For 2011 and 2012 you will not have to reduce your total itemized deductions or personal exemptions based on AGI – they are fully deductible regardless of income. This has nothing to do with the 7½% and 2% exclusions for medical and miscellaneous deductions; they remain in place.
• Partial relief from the “marriage penalty” tax continues through 2012. The standard deduction for a married couple will continue to be twice that for Single filers, and the lower tax brackets for marrieds will be continue to be twice that of those filing as Single.
• The maximum Child Tax Credit remains at $1,000 for 2011 and 2012.
• The enhancements to the Earned Income Credit, such as the additional table for individuals with 3 or more qualifying children, will remain intact through 2012.
• The maximum amount of qualifying expenses eligible for the Child and Dependent Care Credit will continue to be $3,000 for one child and $6,000 for more than one child, as will the increased maximum credit of 35%, for 2011 and 2012.
• The rules for claiming an above-the-line deduction for student loan interest that was in effect for 2010 will remain in effect for 2011 and 2012.
• The maximum annual contribution to a Coverdell Education Savings Account stays at $2,000 for another two years, and expenses for K-12 education will continue to be considered qualified expenses.
(2) An Alternative Minimum Tax (AMT) “patch” is extended for 2010 and 2011. The exemption amounts for 2010 are –
Single and Head of Household = $47,450
Married Filing Joint and Qualifying Widow(er) = $72,450
Married Filing Separate = $36,225
The 2011 exemption amounts are –
Single and Head of Household = $48,460
Married Filing Joint and Qualifying Widow(er) = $74,450
Married Filing Separate = $37,225
And the following personal tax credits continue to reduce the Alternative Minimum Tax for the two years –
• Child Tax Credit
• Hope Scholarship, Lifetime Learning, and American Opportunity education tax credits
• Child and Dependent Care Credit
• Adoption Credit
• Retirement Saver’s Credit
• Energy Credit for qualified energy-saving purchases and repairs
• Credit for The Elderly of the Disabled
(3) The following items, which expired on December 31, 2009, are extended through December 31, 2011 –
• the above-the-line deduction of up to $250.00 for educator expenses,
• the above-the-line deduction for post-secondary tuition and fees,
• the option to deduct state and local sales tax instead of state and local income tax, and
• the ability to make a tax-free transfer of up to $100,000 directly from an IRA to a qualified charity.
Unfortunately for many of my senior citizen clients the additional Standard Deduction of $500 or $1,000 for real estate taxes paid has not been extended, and cannot be claimed on the 2010 Form 1040 or 1040A.
(4) Certain tax benefits that were scheduled to expire on December 31, 2010 have been extended for one or two years -
• The itemized deduction for mortgage insurance premiums under the Interest category is extended for 2011 only. I still contend that there is absolutely no legitimate reason for the existence of this deduction, other than as a way for Congress to repay the mortgage insurance lobby for gifts and bribes.
• BO’s American Opportunity Credit for college expenses, 40% of which is refundable, is continued through December 31, 2012.
• The Energy Credit for qualified purchases for and repairs to your primary personal residence is extended for calendar year 2011. However it seems that the amount of the credit is returned to “its pre-2009 Recovery Act parameters”. I am not quite sure just exactly how the extended credit would work - is the $1,500 maximum credit returnd to $500? I will try to do some more research and let you know what I find in a future post. In the meantime – do any of my fellow tax bloggers or tax pros have more details on this?
(5) The employee share of the Social Security portion of FICA tax – the amount withheld from employee wages - is reduced from 6.2% to 4.2% on the first $106,800 of wages paid in calendar year 2011. Similarly the Social Security portion of the self-employment tax is reduced from 12.4% to 10.4% on the first $106,800 of net earnings from self-employment (less any Social Security wages as reported on Form W-2).
So employees will be able to see an increase in take-home pay beginning with the first pay check of 2011 – assuming that the payroll software has been properly updated.
Many business tax breaks have also been extended – and I will report on the business tax provisions of the Act that affect Schedule C filers in the January 2011 issue of my print newsletter THE SCHEDULE C REPORT, which is available by subscription only.
One of the more controversial aspects of the Act concerns the federal Estate Tax. I will talk about this in detail in a subsequent post – maybe tomorrow.
Unfortunately the Act does not deal with the expanded Form 1099 reporting requirements – truly a missed opportunity. But then, as I have said time and again, the members of Congress are idiots.
I trust my fellow tax pros will let me know if there are any FUs in the above information.