Dear Client and Other Friends-

Once again Congress has passed a late-in-the-year tax bill that not only affects future tax planning but has implications for the year just ended.  With the passage of the 2010 Tax Relief Act (officially the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) we are entering the New Year with greater tax certainty.  However, Congress is continuing its recent trend of only giving us this certainty for a few years at a time. 

In passing the 2010 Tax Relief Act Congress has, for the most part, maintained the status quo.  The Bush era tax cuts were set to expire at the end of 2010 and this Act extends the majority of the cuts for two more years.  There were also a few additional tax incentives added, although most expire at the end of 2012.

Since this is basically a two year extension, Congress will be facing the same type of deadline in 2012 as it did in 2010.  Enacting a reasonable, long-term tax act in 2012 will be even more difficult than it was in 2010 since 2012 will be a presidential election year.  This continued lack of long-term tax certainty makes it very difficult for businesses and individuals to conduct the extended planning which is very important, especially in the economy we are currently experiencing.

With this newsletter, I am going to highlight many of the changes enacted in the 2010 Tax Relief Act that may affect your 2010 return and your tax planning for the next two years.  As with any tax act, there are too many changes to list them all in a single newsletter so I will address the more material changes.

Individuals:

• The rates that have been in effect in recent years - 10%, 15%, 25%, 28%, 33%, and 35% - will remain in place. However, the extension is only for the two years through 2012.
• The 0% and 15% tax rates for long-term capital gains and qualified dividends are extended for two years through 2012.
• Employees and self-employed workers receive a reduction of two percentage points in Social Security tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.  The employer's share of Social Security tax is not affected; it stays at 6.2%. The payroll tax reduction effectively replaces the $400-per-worker tax break included in the 2009 stimulus bill. Note: this is just a one-year break for 2011.
• An AMT "patch" for 2010 and 2011 provides a modest increase in the AMT exemption amounts and allows personal nonrefundable credits to offset AMT as well as regular tax.  Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.  Note: this extension is only through 2011.  Congress will need to address this again for 2012.
• Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 are retained. Specifically, the new law extends the $1,000 child tax credit for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit).  As a reminder, the American Opportunity credit is 100% of the first $2,000 of qualifying educational expenses and 25% of the next $2,000. 
• Non-business energy property credits have been extended for 2011.  However, the maximum credit has been reduced to a cumulative $500 ($200 for windows) for all years since 2005.
• Many of the "traditional" tax extenders are again extended for two years, retroactively for 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes;  and the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers.
• After a one-year hiatus, the estate tax is reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years.  Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.  Since the new estate tax law is only for 2011 and 2012, it will continue to be difficult to prepare long term estate plans.
• For gifts made after December 31, 2010, the gift tax is reunified with the estate tax which means that the $5 million estate tax exemption will also be available for gifts. The law in effect prior to 2010 provided a $3.5 million lifetime exemption for estates, but only $1 million for gifts.
• From a planning standpoint, a nice feature of the new law is that it makes it easier to transfer the $5 million exemption to a surviving spouse, so married couples can shield $10 million of their assets from taxes without the use of trusts. In the language of tax professionals, the estate tax exemption will be "portable."

Business:

• Businesses can write off 100% of their new equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the write-off will drop back to 50%.  For 2010 assets put into service on or prior to September 8, 2010, current law allows a 50% write off of new equipment.
• For tax years beginning in 2012, a small business taxpayer will be allowed to write off under Section 179 up to $125,000 (indexed for inflation) of capital expenditures subject to a phase out once capital expenditures exceed $500,000 (indexed for inflation).  Under current law, businesses can write off up to $500,000 of assets in 2010 and 2011with a phase out of $2,000,000.  This was not changed in the new law.
• The research and development credit was extended through 2011.
• The 15-year write off for qualified leasehold improvements and restaurant buildings was extended through 2011.

There were some items that I had hoped would be in the new tax law that were not.  High on that list was a repeal of the requirement that starting in 2012 businesses must prepare 1099s for anyone to whom the business pays $600 or more to for services or products in the course of their business.  I am sure there will be more discussion on this issue before its effective date.

As a side note- tax audits are picking up in the Seattle area.  We have heard that many new auditors have been hired and the IRS will keep them busy.  Also, as part of any audit of a business they are looking hard at 1099 compliance.  In other words, they want to make sure the business has prepared 1099s for anyone to which the business paid more than $600 for services.  Since 1099s are due by the end of January for the 2010 year, it would be a good time to review your compliance.

Please contact me if you have any questions.

Tim

Disclaimer: By nature of a newsletter, this information is in summary form and does not necessarily detail every requirement, restriction or tax planning opportunity.  Prior to executing any tax strategy, you should consider non-tax implications - you may cost yourself more than you save in taxes.  Please use this information with these limitations in mind.  If you are considering executing a particular tax strategy, please contact me so we can discuss the specifics.

          Tim Jacobsen, CPA
 Strader Hallett & Co., P.S.
    Certified Public Accountants

5209 Corporate Center Court Southeast
Lacey, Washington   98503

(360) 456-2100 ext 134
(360) 456-2590  fax
www.StraderHallett.com

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