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Under pre-Act law, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16 ), other than those made permanent or extended by subsequent legislation, were set to sunset and no longer apply to tax or limitation years beginning after 2010. (Sec. 901 of EGTRRA) Beginning in 2011, the EGTRRA sunset would have wiped out a host of favorable tax rules, such as: favorable income tax rate structure for individuals; marriage penalty relief; and liberal education-related deduction rules.
Similarly, under Sec. 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27 ), as modified by Sec. 102 of P.L. 109-222, the favorable tax treatment of long-term capital gain and qualified dividends would have ended after 2010. The alternative minimum tax (AMT) exemption amounts were "temporarily" increased for four years by EGTRRA, and then "temporarily" increased again by a succession of tax laws. The ability of individuals to use most nonrefundable personal credits to offset AMT also is "temporary," and has been extended over the years by a series of new laws. Under pre-Act law, after 2010, the AMT exemption amounts were to have plummeted to their pre-EGTRRA level, and individuals would not have been able to use most nonrefundable personal credits to offset AMT.
Finally, the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 1115) temporarily boosted the credit incentives for higher education (i.e., created the American Opportunity Tax Credit, or AOTC), and liberalized the rules for the refundable child tax credit and the earned income tax credit (EITC). Under pre-Act law, these ARRA incentives would have ended on Dec. 31, 2010.
New law. Under 2010 Tax Relief Act Secs. 101 through 103, the Sec. 901 EGTRRA sunset, the Sec. 303 JGTRRA sunset, and the ARRA sunsets relating to the AOTC, child tax credit, and EITC are extended for two years (one year in case of the adoption rules). Thus, all of the favorable tax rules explained below remain in place through 2012.
Caution: Unless Congress acts, the favorable rules explained below will revert after 2012 to their pre-EGTRRA, pre-EGTRRA, and pre-ARRA rules. For example, the tax rates for individuals in 2013 will be 15%, 28%, 31%, 36%, and 39.6%.
For tax years beginning in 2010, the income tax rates for individuals are 10%, 15%, 25%, 28%, 33% and 35%. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses is 200% of the 15% tax bracket for individual filers (in the so-called marriage penalty relief).
Under pre-Act law, for tax years beginning after Dec. 31, 2010, the rates were scheduled to rise to 15%, 28%, 31%, 36% and 39.6%; and the 15% tax bracket for joint filers and qualified surviving spouses was scheduled to drop to 167% of the 15% tax bracket for individual filers.
New law. Under Sec. 101 of the 2010 Tax Relief Act, the tax rate schedules for individuals will remain at 10%, 15%, 25%, 28%, 33% and 35% for two additional years, through 2012. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% of the 15% tax bracket for individual filers through 2012.
Under Sec. 101 of the 2010 Tax Relief Act, the top four income tax rates that apply to estates and trusts under pre-Act law (25%, 28%, 33%, and 35%) are extended two additional years through 2012 (rather than rising to 28%, 31%, 36%, and 39.6% for tax years beginning after Dec. 31, 2010).
For tax years beginning in 2010, the basic standard deduction for a married couple filing a joint return is twice the basic standard deduction for an unmarried individual filing a single return. Under pre-Act law, for tax years beginning after Dec. 31, 2010, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) was to be 167% of the standard deduction for single taxpayers.
New law. Under Sec. 101 of the 2010 Tax Relief Act, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% of the standard deduction for single taxpayers for two additional years, through 2012.
Observation: For an individual who can be claimed as a dependent on another's return, the basic standard deduction for 2011 will be $950 (same as for 2010), or $300 (same as for 2010) plus the individual's earned income, whichever is greater. However, the standard deduction may not exceed the regular standard deduction for that individual.
For 2011, the additional standard deduction for married taxpayers 65 or over or blind will be $1,150 (up from $1,100 for 2010). For a single taxpayer or head of household who is 65 or over or blind the additional standard deduction for 2011 will be $1,450 (up from $1,400 for 2010).
Unless he elects to claim the standard deduction, a taxpayer is allowed to deduct his itemized deductions (generally those deductions which aren't allowed in computing adjusted gross income). For tax years beginning in 2010, there was no overall limitation on itemized deductions based on the taxpayer's adjusted gross income (AGI), although separate limitations (floors) might apply to the particular deduction.
Under pre-Act law, for tax years beginning after Dec. 31, 2010, the total amount of itemized deductions was to be reduced (the "Pease limitation") by 3% of the amount by which the taxpayer's AGI exceeds a threshold amount ($169,550 for 2011), with the reduction not to exceed 80% of the otherwise allowable itemized deductions.
New law. Under Sec. 101 of the 2010 Tax Relief Act, the itemized deductions of higher-income taxpayers are not reduced for two additional years, through 2012.
Personal exemptions generally are allowed for the taxpayer, his or her spouse, and any dependents. For tax years beginning in 2010, there was no overall reduction in the personal exemption amount based on the taxpayer's AGI.
Under pre-Act law, for tax years beginning after Dec. 31, 2010, the total amount of exemptions that could be claimed by a taxpayer was to be reduced (personal exemption phaseout (PEP)) by 2% for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold (in 2011, $169,550 for unmarried individuals; $254,350 for married couples filing joint returns; $211,950 for heads of household). The phase-out rate was to be 2% for each $1,250 for married taxpayers filing separate returns.
New law. Under Sec. 101 of the 2010 Tax Relief Act, a higher-income taxpayer's personal exemptions are not phased out for two additional years (for 2011 and 2012) when AGI exceeds an inflation-adjusted threshold.
Capital gain. For tax years beginning in 2010, for both regular tax and AMT purposes, the maximum rate of tax on the adjusted net capital gain of an individual is 15%. If the adjusted net capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a 0% rate. That part of net capital gain attributable to unrecaptured section 1250 gain (i.e., gain attributable to real estate depreciation) is taxed at a maximum rate of 25%. Net capital gain attributable to collectibles gain and section 1202 gain is taxed at a maximum rate of 28%.
Under pre-Act law, for tax years beginning after Dec. 31, 2010, the maximum rate of tax on an individual's adjusted net capital gain was to be 20%. Any adjusted net capital gain which otherwise would be taxed at the 15% rate was to be taxed at a 10% rate. In addition, any gain from the sale or exchange of property held more than five years that would otherwise have been taxed at the 10% capital gain rate would be taxed at an 8% rate. Any gain from the sale or exchange of property acquired after 2000 and held for more than five years, that would otherwise have been taxed at a 20% rate was to be taxed at an 18% rate. Net capital gain attributable to unrecaptured section 1250 gain was to continue to be taxed a maximum rate of 25%. Net capital gain attributable to collectibles gain and section 1202 gain was to continue to be taxed at a maximum rate of 28%.
Qualified dividend income. For tax years beginning in 2010, for both the regular tax and AMT purposes, an individual's qualified dividend income is taxed at the same rates that apply to net capital gain. Thus, an individual's qualified dividend income is taxed at a 15% and (for qualified dividend income which otherwise would be taxed at a 10% or 15% rate if the special rates did not apply) at a zero rate. The amount of a taxpayer's unrecaptured section 1250 gain taxed at a maximum 25% rate is limited to the taxpayer's net capital gain determined without regard to the taxpayer's qualified dividend income. (In addition, a taxpayer must hold stock for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date in order for dividends on the stock to qualify as qualified dividend income.)
Under pre-Act law, for tax years beginning after Dec. 31, 2010, dividends received by an individual were to be taxed at ordinary income tax rates. The rules excluding qualified dividend income from net capital gain in computing unrecaptured section 1250 gain taxed at a 25% rate, and the holding period rule for determining when dividends on stock qualify as qualified dividend income were to expire for tax years beginning after Dec. 31, 2010.
New law. Under Sec. 102 of the 2010 Tax Relief Act, adjusted net capital gain will be taxed at a maximum rate of 0/15% for two additional years, through 2012. A qualified dividend paid to individuals will be taxed at the same rates as adjusted net capital gain through 2012. In addition, the 2010 Tax Relief Act also extends for two years, through 2012, the rules excluding qualified dividend income from net capital gain in computing unrecaptured section 1250 gain taxed at a 25% rate; and the holding period rule for determining when dividends on stock qualify as qualified dividend income.
For tax years beginning in 2010, individuals may claim a maximum $1,000 child tax credit under Code Sec. 24 for each qualifying child under age 17 that the taxpayer can claim as a dependent. The amount of the allowable credit is reduced (not below zero) by $50 for each $1,000 (or fraction thereof) of modified AGI above: $110,000 for joint filers, $75,000 for unmarried individuals, and $55,000 for marrieds filing separately. The child tax credit can offset both the regular tax and AMT. The child tax credit is refundable, but only to the extent of the greater of: (1) 15% of taxable earned income above $3,000 (as adjusted for inflation), or (2) for a taxpayer with three or more qualifying children, the excess of his social security taxes for the tax year over his earned income credit for the year. Under pre-Act law, for tax years beginning after Dec. 31, 2010, the maximum credit was to drop from $1,000 to $500, and the credit was not to be allowed against AMT. In addition, more restrictive rules were to apply to refundable child credit.
New law. Under Secs. 101 and 103 of the 2010 Tax Relief Act, the $1,000 child tax credit is extended and allowed to be used against regular income tax and the AMT for two years, through 2012. The formula for determining the refundable child credit, with the earned income threshold of $3,000 (but not adjusted for inflation) is extended for two years, through 2012. Also extended for two years is the treatment of the refundable portion of the child tax credit as not constituting income or a resource in determining the eligibility or amount of benefits or assistance under any Federal program or State or local program financed with Federal funds.
A tax credit for employer-provided child care applies for 2010 under Code Sec. 45F . It is equal to the sum of the following expenses (up to $150,000) for the tax year: (1) 25% of qualified child care expenses, which are expenses to buy, build, rehabilitate, or expand property to be used as part of an employer's qualified child care facility, for which a deduction for depreciation (or amortization) is allowable, and which isn't part of the taxpayer's (or an employee's) principal residence. Qualifying child care expenses also include operating costs of a taxpayer's qualified child care facility (including costs related to employee training, scholarship programs, and to providing increased compensation to employees with higher levels of child care training), and amounts paid under a contract with a qualified child care facility to provide child care services to the taxpayer's employees; and (2) 10% of qualified child care resource and referral expenses (i.e., amounts paid or incurred under a contract to provide child care resource and referral services to an employee).
Under pre-Act-law, for tax years beginning after Dec. 31, 2010, the child care credit was to no longer apply.
New law. Under Sec. 103 of the 2010 Tax Relief Act, the employer-provided child care tax credit is extended for two years, through 2012.
A Code Sec. 21 dependent care tax credit may be claimed in 2010 by an individual who has one or more qualifying individuals and incurs employment-related expenses enabling him to be gainfully employed. For 2010, the maximum dependent care tax credit is $1,050 (35% of up to $3,000 of eligible expenses) if there is one qualifying individual, and $2,100 (35% of up to $6,000 of eligible expenses) if there are two or more qualifying individuals. The 35% credit rate is reduced, but not below 20%, by one percentage point for each $2,000 (or fraction of) AGI above $15,000. Thus, the credit percentage is reduced to 20% for taxpayers with AGI over $43,000.
Under pre-Act-law, for tax years beginning after Dec. 31, 2010, the level of the credit was to be reduced: the maximum credit percentage was to drop from 35% to 30% and the AGI-based percentage reduction was to begin at $10,000 instead of $15,000. The creditable expense was to drop from $3,000 to $2,400 (for one qualifying individual) and from $6,000 to $4,800 (for two or more). New law. Under Sec. 101 of the 2010 Tax Relief Act, the expanded dependent care tax credit applies for two additional years, through 2012.
American opportunity tax credit. For tax years beginning in 2010, individuals may claim an American opportunity tax credit (AOTC) under Code Sec. 25A equal to 100% of up to $2,000 of qualified higher-education tuition and related expenses (including course materials), plus 25% of the next $2,000 of expenses paid for education furnished to an eligible student in an academic period—i.e., a maximum credit of $2,500 a year for each eligible student. For 2010, the availability of the credit phases out ratably for taxpayers with modified AGI of $80,000 to $90,000 ($160,000 to $180,000 for joint filers). The AOTC (which expanded the credit available under the Hope Scholarship Credit) is allowed for each of the first four years of the student's post-secondary education in a degree or certificate program. The credit can be claimed against AMT liability; and 40% of the otherwise allowable AOTC is refundable (unless the taxpayer claiming the credit is a child under age 18 or a child under age 24 who is a student providing less than one-half of his support, who has at least one living parent, and doesn't file a joint return).
Under pre-Act law, for tax years beginning after Dec. 31, 2010, instead of the AOTC an individual was to be able to claim a Hope credit equal to 100% of the first $1,200 (as inflation adjusted) of qualified higher-education tuition and related expenses (not including course material), plus 50% of the next $1,200 (as inflation-adjusted) of expenses paid for education furnished to an eligible student in an academic period—i.e., a total maximum Hope credit of $1,800. For each eligible student, the Hope the credit would be allowed only for expenses paid for the first two years of the post-secondary education, and it was to phase out ratably for taxpayers with lower specified (inflation adjusted) modified AGI.
Exclusion for scholarships. For 2010, a qualified individual can exclude from income a qualified scholarship or qualified tuition reductions under Code Sec. 117 . These exclusions generally do not apply to any amounts received by a student that are payment for teaching, research, or other services as a condition for receiving the scholarship or tuition reduction.
Under pre-Act law, for tax years beginning after Dec. 31, 2010, an exception to the no payment for teaching, research, or other services rule for the National Health Service Corps (NHSC) Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program (Armed Forces Scholarship Program) was to no longer apply.
Employer-provided educational assistance. For 2010, an employee may exclude educational assistance provided under an employer's qualified educational assistance program, up to an annual maximum of $5,250 under Code Sec. 127 . The education received need not be job-related.
Under pre-Act law, for tax years beginning after Dec. 31, 2010, the specific exclusion for employer-provided educational assistance was to no longer to apply, so that educational assistance would be excludable from gross income only if it qualifies as a working condition fringe benefit (i.e., the expenses would have been deductible as business expenses if paid by the employee; such expense must be related to the employee's current job).
Above-the-line student loan interest deduction. Individuals can deduct a maximum of $2,500 annually for interest paid on qualified higher education loans under Code Sec. 221 . For 2010, the deduction phases out ratably for taxpayers with modified AGI between $60,000 and $75,000 ($120,000 and $150,000 for joint returns).
Under pre-Act law, for tax years beginning after Dec. 31, 2010, the phaseout ranges were to revert to a base level of $40,000 to $55,000 ($60,000 to $75,000 for joint returns), adjusted for inflation occurring since 2002. In addition, the interest was not to be deductible beyond the first 60 months that interest payments are required.
Observation: The 2010 Tax Relief Act has also extended the Code Sec. 222 above-line-deduction for qualified tuition and related expenses.
Coverdell education savings accounts. Taxpayers can contribute up to $2,000 per year to Coverdell Education Savings Accounts (CESAs) for beneficiaries under age 18 (and, special needs beneficiaries of any age). The account is exempt from income tax, and distributions of earnings from CESAs are tax-free if used for qualified education expenses. The contribution limit is phased out for contributors with modified AGI between $95,000 and $110,000 ($190,000 and $220,000 for joint returns).
Under pre-Act law, for tax years beginning after Dec. 31, 2010, the following were to apply: a $500 contribution limit; a phaseout range of $150,000 - $160,000 for joint returns; elementary and secondary education expenses excluded from qualified expenses; and no special age rules for special needs beneficiaries. In addition, provisions covering the following were to expire: clarification that corporations and other entities were permitted to make contributions, regardless of the income of the corporation or entity during the year of the contribution; certain rules on when contributions were deemed made and extending the time during which excess contributions could be returned without additional tax; certain rules on coordination with the Hope and Lifetime Learning credits; and certain rules on coordination with qualified tuition programs.
New law. Under the 2010 Tax Relief Act, the AOTC, the NHSC Scholarship Program and the Armed Forces Scholarship Program exception, the exclusion for employer-provided educational assistance, the student loan interest deduction, and Coverdell education savings accounts rules are extended for two years, through 2012. (Act Sec. 101, Act Sec. 103(a))
The alternative minimum tax (AMT) is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT rate of 26% or 28%.
Under pre-Act law, the AMT exemption amounts for tax years beginning after 2009 were: $33,750 for unmarried individuals; $45,000 for married couples filing jointly and surviving spouses; and $22,500 for married individuals filing separately.
New law. The 2010 Tax Relief Act patches the AMT exemption amounts for 2010 and 2011. (Code Sec. 55(d), as amended by Act Sec. 201)
The AMT exemption amounts for 2010 are as follows:
Observation: The AMT exemption amount for married individuals filing separately is 50% of the AMT exemption amount for joint filers and surviving spouses. Thus, for 2010, the AMT exemption amount for married individuals filing separately is increased to $36,225 (50% of $72,450).
AMT exemption of a child subject to the kiddie tax. For 2010, for a child subject to the kiddie tax (i.e., certain children with unearned income over $1,900 for 2010), the AMT exemption amount can't exceed the sum of the child's earned income plus $6,700. In addition, the kiddie tax AMT exemption can't be more than the child's regular AMT exemption (i.e., the unmarried individual's exemption amount, see above). Thus, under the 2010 Tax Relief Act, a child subject to the kiddie tax is entitled to a maximum AMT exemption of $47,450 in 2010, but only if he has earned income of $40,750 ($6,700 + $40,750 = $47,450) or more before taking the phaseout for unmarried individuals into account.
Under the 2010 Tax Relief Act, the AMT exemption amounts for 2011 will be as follows:
A number of personal credits are nonrefundable (i.e., the dependent care credit, the credit for the elderly and disabled, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain nonbusiness energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehicles, and the D.C. first-time homebuyer credit).
For taxable years beginning before 2010, the nonrefundable personal credits are allowed to the extent of the full amount of the individual's regular tax and alternative minimum tax. However, under pre-Act law, for tax years beginning after 2009, the nonrefundable personal credits (other than the child credit, the credit for savers, the credit for residential energy efficient property, the credit for certain plug-in electric drive motor vehicles, the credit for alternative motor vehicles, and the credit for new qualified plug-in electric drive motor vehicles) are allowed only to the extent that the individual's regular income tax liability exceeds the individual's tentative minimum tax, determined without regard to the minimum tax foreign tax credit.
New law. For tax years beginning during 2010 or 2011, the 2010 Tax Relief Act allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits. (Code Sec. 26(a)(2), as amended by Act Sec. 202)
Posted: December 2010
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