Tax Cuts Retained The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 keeps tax reductions, that were due to expire, in place:
Individual Tax Rates – Under pre-2010 tax legislation tax rates for individuals ranged from 10% to 35%. Rates were due to go back to a range of from 15% to 39.6%. The lower rates will remain in place through 2012.
Child Tax Credit – The credit for a dependent child under the age of 17 at the end of the year was due to decrease from $1,000 to $500 at the end of 2010. The $1,000 credit has been reinstated until the end of 2012.
Earned Income Tax Credit – The income range, for this credit for lower income taxpayers with some dependent children, was expanded to include more eligible taxpayers. Also it was raised to include a maximum of 3 eligible children, from the previous limit of 2 children. This expanded credit is extended to the end of 2012, instead of going back to the previous credit limitations.
Dependent Care Credit – This is a tax credit for taxpayers who pay for the care of a child under 13, or for an incapacitated dependent or spouse, to allow them to work or look for work. Eligible expenses to calculate this credit had been raised from $2,400 to $3,000 for one dependent, and from $4,800 to $6,000 for two dependents. The higher limits, which would have expired after 2010, will remain in effect through 2012.
Student Loan Interest Deduction – The deduction for interest paid on a loan for post-secondary education had been modified to remove the 60-month repayment rule, and expand the allowable income range to qualify for the deduction. These changes were to expire at the end of 2010, but are restored through 2012.
Marriage Penalty Relief – The so-called “marriage penalty”, resulting from the unequal tax rates of single taxpayers versus married couples, at comparable income levels, had been partially remedied by the expansion of the 15% tax bracket for married taxpayers filing together to twice that of single taxpayers. Also the standard deduction from taxable income for married taxpayers filing together had been raised to twice that of single taxpayers. These provisions, which had been scheduled to end after 2010, are now extended through 2012.
Capital Gains and Stock Dividends – Under current law the maximum tax rate on Qualified Capital Gains, and dividends received from American corporations, and certain foreign corporations, is 15%. For certain taxpayers this rate could be as low as zero. This treatment would have expired at the end of 2010 but is extended through 2012.
Miscellaneous Extended Tax Provisions – The deduction allowed to certain teachers for the purchase of up to $250 of classroom supplies, the deduction of up to $2,500 of post-secondary tuition paid for taxpayers and dependents, the itemized deduction for sales tax paid (especially useful for Wyoming taxpayers), and the option to fulfill the minimum distribution requirements from IRAs by making a direct charitable contribution from the IRA (and so avoid recognizing additional taxable income) are all extended through 2011. They had been scheduled to expire at the end of 2009.
Mortgage Insurance Premiums Certain mortgage insurance premiums paid from 2007 through 2010, in connection with the purchase of a residence, are deductible as qualified residence interest. This deduction for mortgage insurance premiums has been extended for an additional year.
Limit on Itemized Deductions and Personal Exemptions Before 2010 higher income taxpayers were subject to a phase-out of itemized deductions and personal exemptions (the deduction for each taxpayer and dependent on a tax return) at certain income levels. For 2010 these limits were repealed, and scheduled to be resumed after 2010. The 2010 Tax Relief Act extends the repeal of these limits through the end of 2012.
Education Savings Accounts Previous legislation had raised the maximum annual contribution from $500 to $2,000 and made elementary and secondary school expenses, in addition to post-secondary school expenses qualified expenses. These enhancements were due to expire after 2010. The 2010 Tax Relief Act extends these enhancements for two years, through the end of 2012.
Adoption Credit For 2010 tax returns the Adoption Credit, for the Qualified Adoption Expenses of adopting a domestic or foreign child, has been increased with a major change. Qualified Adoption Expenses are the reasonable and necessary adoption fees, court costs, attorney fees, and other expenses directly related to, and for the principal purpose of, adopting an eligible child. These expenses may be for an unsuccessful domestic adoption. For 2010 the maximum credit has been increased from $12,150 to $13,270. The significant change to the credit is that the credit is refundable; meaning any portion of the credit that exceeds the net tax liability will be refunded to the taxpayer(s). Carryover of an Adoption Credit from a previous year will also be included as refundable.
For the adoption of a domestic child the credit may be claimed for expenses incurred before the adoption is final, but the credit is claimed on the tax return for the taxable year following the year the expenses were incurred. For the adoption of a foreign child the expenses are only claimable in the taxable year the adoption is final. Expenses paid or incurred in the taxable year before the adoption is final are treated as paid in the taxable year in which the adoption is final.
For a special needs child a taxpayer may claim the full amount of the credit, without regard to the actual amount of Qualified Adoption Expenses actually paid or incurred.
Because some verifying documents to claim the credit need to be attached to the tax return, the tax return claiming the credit must be filed as a paper return.
Lower Payroll Tax for Employees In 2011 employees will be have almost one-third less Social Security tax withheld from their wages. Social Security tax withholding will be reduced from 6.2 percent to 4.2 percent for 2011. For a worker who earns $50,000 this reduction would result in approximately $1,000 additional take-home pay in 2011. This reduction will not result in a decrease to Social Security benefits to be received. The Medicare tax withholding of 1.45 percent remains unchanged.
The Affordable Care Act – Tax Provisions Starting March 30, 2010 employees may receive tax-free health care benefits for their children under the age of 27. In addition the requirement that the child is the dependent of the taxpayer is removed. The same benefit is available to self-employed individuals who are eligible for the self-employed health insurance deduction.
Beginning January 1, 2011 Flexible Spending Accounts (also known as cafeteria plans), Archer Medical Savings Accounts, and Health Savings Accounts may no longer reimburse costs of over-the-counter medications. These costs may still be reimbursed if a prescription for these medications is obtained from the physician. This provision does not apply to insulin.
Starting with wage reporting for 2011 (form W-2) employers may report the cost of health insurance coverage that they provide for their employees. For W-2s to be received in 2012 for 2011 wages, providing this information will be optional; providing this information will be required for 2012 W-2s. This employer cost is not a taxable amount but is being provided to help make taxpayers more informed consumers.
Additional Information About 2010 Tax Returns
Deductible Use of an Automobile Use of an automobile for business is deductible for self-employed taxpayers, and employees of a business. Instead of using actual auto expenses taxpayers have the option of calculating a deduction using “Standard Mileage Rates” (rates per mile of use) established by the IRS and adjusted annually according to inflation rates (for instance the rate was significantly increased for 2008 because of the spike in gas prices). For tax year 2010 the Standard Mileage Rates are:
Business use: 50 cents per mile.
Moving expense or medical transportation expense: 16.5 cents per mile.
Charitable contribution: 14 cents per mile.
For 2011 tax returns the business use rate rises to 51 cents and the medical and moving mileage rate increases to 19 cents per mile. Charitable use of an auto remains at 14 cents per mile.
Rollover of a Traditional IRA, and Other Retirement Plans, to a Roth IRA A Roth IRA is a retirement plan set up by an individual that will result in non-taxable retirement income. Unlike a Traditional IRA Roth IRA contributions cannot be deducted from taxable income. High income has prevented many taxpayers from making contributions and rollovers (or conversions) to Roth IRAs. Those with income over $100,000 could not convert a retirement plan to a Roth IRA. Beginning in tax year 2010 the income limit (or restriction) for rollovers from Traditional IRAs, or tax-deferred employer retirement plans like a 401(k), to Roth IRAs has been removed. For such rollovers made in 2010 taxpayers may include half the taxable portion of the amount rolled-over on their 2011 tax return, and the remaining half on their 2012 tax return, and not include any part on their 2010 tax return. In addition the amount rolled-over into the Roth IRA can be re-characterized (or converted) back to a Traditional IRA by October 17, 2011 (and so remain non-taxable) if the taxpayer has filed on time (including extensions). This gives taxpayers the ability to reconsider whether the rollover to the Roth IRA in 2010 was in their best interests, and so reverse their rollover. Two important points: to re-characterize a rollover from an employer plan, the amount must be deposited to a new or existing Traditional IRA and not back to the employer plan; and any Federal Tax withheld from the taxable amount to be rolled over, needs to made up in the deposit to the Roth IRA by the taxpayer, or that tax withheld amount will be taxable for 2010.
Inflation Adjustments For 2010 tax returns the Standard Deduction (the amount you are allowed to deduct from your taxable income according to your filing status) remains unchanged from 2009 amounts except for Head of Household filing status; the Standard Deduction for that filing status is raised from $8,000 to $8,400.
The amount that is allowed to be deducted for each taxpayer and their dependents remains at $3,650, but the phase-out for high-income taxpayers does not apply. The phase-out for itemized deductions for high income will also not apply for 2010 tax returns.
The maximum amount of wages subject to Social Security tax did not increase from the 2009 amount of $106,800. As in 2009 all wages are subject to Medicare tax.
The threshold amount of wages paid to a household employee (nanny, housekeeper, etc.) that requires payment of Social Security and Medicare tax remains at $1,700. This means that if you paid a household employee less than $1,700 cash wages in the year you do not have to report and pay Social Security and Medicare tax on those wages.
For 2010 tax returns you may no longer add property tax paid on real property to your standard deduction, nor the tax paid on the purchase of a new automobile in 2010. However if you purchased a new auto after February 16, 2009 and before January 1, 2010 you may add the tax on that purchase to your standard deduction if the tax was paid in 2010 (a definite possibility for Wyoming taxpayers, since the tax is paid to the county after the purchase).
These provisions may still be retained depending on current legislation.
New Tax Preparer Requirements The IRS has experienced many instances of tax preparer negligence, and in some cases fraud. New regulations have been put into place to help insure that those who prepare tax returns for compensation are knowledgeable and diligent. For tax returns filed after December 31, 2010 those who prepare an income tax return for a fee will be required to:
(1) Have a PTIN (Preparer Tax Identification Number) This is a registration number that replaces a social security number for identification of an individual tax preparer. The IRS has an associated application form that identifies the preparer by name, physical location of office(s), social security number and other identifying information.
(2) Pass a competency examination This is to help insure that tax preparers have the knowledge required to prepare Income Tax Returns. This requirement will begin in the year 2012.
(3) Obtain 15 hours of Continuing Education annually.
Income tax rules and regulations are constantly being changed and updated. Professional tax preparers need to keep abreast of these changes. This requirement includes 2 hours of Ethics.
At Paramount Tax and Accounting, LLC we are owned by an Enrolled Agent and our professional staff has over 40 years combined experience. Enrolled Agents (EAs) are given the same powers, in matters before the IRS, as CPAs and Attorneys. To become an EA, we were required to pass an exhaustive 16 hour examination in tax preparation for Individuals, Corporations, Partnerships, and Estates and Trusts. We are also required to get 24 hours of continuing education annually, including 2 hours of Ethics. We have exceeded these new IRS requirements in years past, and will continue to do so in accordance with our enrollment.
First-time Homebuyer Credit A refundable credit of up to $8,000 is available to “first-time homebuyers” who purchase, or enter a binding agreement to purchase a principal residence by April 30, 2010. The purchase transaction must be completed by September 30, 2010. This credit has been modified a number of times since its inception for 2008 tax returns. A “first-time homebuyer” is a person who has not had an interest in a principal residence for the three year period ending on the date of the purchase. The credit is equal to 10% of the purchase price to a maximum credit of $8,000 (for 2008 purchases the maximum credit was $7,500 and the credit had to be repaid over a 15 year period). Homes with a purchase price of more than $800,000 do not qualify for the credit. The credit is refundable meaning any part of the credit not needed to offset income tax will be refunded to the taxpayer. Unrelated taxpayers may allocate the credit for a home purchase between them, in any reasonable manner. A 2010 purchase can be claimed on a 2009 tax return or 2010 tax return. Because of documentation requirements, a return claiming the credit must be filed as a paper return. A reduced credit is available to taxpayers who replace a principal residence that they’ve occupied for an extended period.
First-time Homebuyer Credit – 2008 The First-time Homebuyer Credit first appeared on 2008 Individual Income Tax Returns. At that time the maximum credit allowed was $7,500; it was actually an interest-free loan, which was to be repaid over a 15 year period. It will be repaid by adding an additional amount of tax on form 1040. The repayment begins on tax returns to be filed in 2011 for the year 2010. If the full amount of the credit ($7,500) was received, the annual payment would be $500. If less than the full credit was received the annual payment due would be the amount of credit allowed divided by 15 (e.g. if the credit allowed was $5,700 the annual payment would be $380). If you received the credit on a return prepared by Line One, your record copy of the return should include a repayment schedule, for your convenience. If you’ve mislaid your record copy of your 2008 return prepared by us, we can provide a copy of your repayment schedule.
Residential Energy Credit A tax credit (tax reduction) is available for 2010 tax returns, for adding energy efficient property or improvements to your principal residence located in the United States. The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems. The credit is equal to 30% of the cost of these improvements. This credit is available on 2009 and 2010 tax returns. The maximum total credit allowed, for both 2009 and 2010 combined, is $1,500 (or a total investment of $5,000). Manufacturers will certify that their products meet the standards for this credit, and make this certification available to purchasers in printed or printable (e.g. from a website) form. An “Energy Star” label alone does not indicate that the property conforms to the energy credit standards.
Earned Income Tax Credit This refundable tax credit, for lower income taxpayers, has been increased for 2010 tax returns. For 2009 the maximum credit was $5,657 with three or more qualifying children; for 2010 the maximum credit is $5,666 with three or more qualifying children. The maximum income at which the credit is completely phased out was $48,279 for a married couple filing together (married taxpayers filing separately are not eligible for the credit) and will be $48,362. Maximum income amounts are less for unmarried taxpayers, and those taxpayers with one or two qualifying children. Filers with no qualifying children also qualify for a lesser credit. A “qualifying child” is generally under age 19 (or under age 24 if a full-time student), has lived in the same home as the taxpayer for more than 6 months of the year, and is related to the taxpayer. There also must be earned (work) income on the tax return. Any portion of the credit not used to pay tax is refunded to the taxpayer. Those with more than $3,100 of investment income (e.g. interest income, dividends, capital gains) do not qualify for any earned income tax credit. This amount is unchanged from 2009 tax returns.
Buford Address: 4315 S Lee Street Suite 400 Buford, GA 30518