Tax Planning and Tax Consulting Requires Understanding of 2010 Tax Relief Act

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Recently the President signed into law the 2010 Tax Relief Act which includes an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year patch of the alternative minimum tax (AMT), a 2-percentage point cut in employee-paid payroll taxes and self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactive and extended tax breaks for individuals and businesses.

In this ever-changing tax environment, it is more important than ever before to be aware of, prepared for and able to plan around the complexities of the tax law.

Recently the President signed into law the 2010 Tax Relief Act which includes an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year patch of the alternative minimum tax (AMT), a 2-percentage point cut in employee-paid payroll taxes and self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactive and extended tax breaks for individuals and businesses.

“These are some of the major provisions of the new law that will impact individuals and business in their tax planning,” said HORNE Tax Partner John Scott, CPA. “In this ever-changing tax environment, it is more important than ever before to be aware of, prepared for and able to plan around the complexities of the tax law.”

The major provision of the act is the two year extension of the Bush-era tax cuts.

“This means that income tax rates for individuals will stay at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent; instead of moving to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent. Both capital gain and dividend tax rates remain at 15 percent, instead of moving to 20 percent and up to 39.6 percent, respectively,” Scott said.

The Alternative Minimum Tax (AMT) patch means the higher exemption amount from AMT remains (instead of moving to pre-2001 levels) and allows for nonrefundable personal credits to offset AMT. Estate tax relief is also part of the act with the exemption amount increasing to $5 million (instead of $1 million) with the top tax rate reduced to 35 percent (instead of 55 percent).

Both the tax bracket and standard deduction for married couples remain at 200 percent of the respective amounts for single taxpayers thereby avoiding the "marriage tax penalty."

“Phase-outs for personal exemptions and itemized deductions mean higher-income taxpayers will not have their personal exemption and itemized deduction amounts reduced as a result of their income levels,” Scott said.

Under prior law, employees pay a 6.2 percent Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay 12.4 percent Social Security self-employment taxes on all their self-employment income up to the same threshold. For 2011, the new law gives a 2 percent payroll/self-employment tax holiday for employees and self-employeds. As a result, employees will pay only 4.2 percent Social Security tax on wages and self-employed individuals will pay only 10.4 percent Social Security self-employment tax on self-employment income up to the threshold.

Incentives for businesses to invest in machinery and equipment are also part of the Tax Relief Act according to Scott. This includes 100 percent first-year bonus depreciation for new machinery and equipment placed in-service after September 8, 2010, and before January 1, 2012. Other tangible personal property is eligible in addition to machinery and equipment.

There is 50 percent first-year bonus depreciation for new machinery and equipment placed in-service after December 31, 2011, and before January 1, 2013 (other tangible personal property is eligible in addition to machinery and equipment).

An extension through December 31, 2012, of the election to accelerate the AMT credit instead of claiming first-year depreciation is included. Also, it allows for increased expensing amount to $125,000 (instead of $25,000) and investment-based phase-out to $500,000 (instead of $200,000) for tax years beginning after December 31, 2011.

“There are several expired tax breaks that were retroactively reinstated and extended through 2011,” Scott said.

These include: research and development tax credit; new markets credit, 15-year write-off for qualifying leasehold improvements, restaurant buildings and improvements and retail improvements; empowerment zone tax incentives; work opportunity tax credit (no extension for Hurricane Katrina employees); election to deduct state and local general sales taxes in lieu of state and local income taxes; extension of tax-free distributions from IRAs for charitable purposes; extension of deadlines related to tax-exempt bonds for the Gulf Opportunity Zone; and 50 percent first-year bonus depreciation for certain new property investments made in specified hardest hit areas with the Gulf Opportunity Zone (expenditures in 2011 for property placed in-service by December 31, 2011).

Both individuals and businesses are encouraged to seek advice from a professional tax consulting service that is up-to-date with the 2010 Tax Relief Act requirements.

About HORNE LLP

HORNE is one of the top 50 accounting and business advisory firms in the country, as reported by both Public Accounting Report (PAR) and INSIDE Public Accounting (IPA), and one of the top 10 accounting and business advisory firms in the Southeast. With offices in Mississippi, Tennessee, Alabama, Louisiana and Texas, the firm provides clients across the nation with services such as tax planning, tax consulting, accounting for small business, auditing, assurance, franchise bookkeeping and health care accounting. For more information on HORNE LLP, visit http://www.horne-llp.com.

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