On December 17, 2010 President Obama signed into law the 2010 Tax Relief Act. Here are the highlights:
Capital Gains & Dividends: Qualified capital gains and dividends will continue to be taxed at 15% (zero percent for taxpayers in the 10 and 15 percent tax brackets) for years 2011 & 2012. After 2012, capital gains tax will increase to 20% and dividends will be taxed at regular tax rates.
Tax Rates: There is two-year extension of the reduced individual income tax rates till the end of year 2012. Also, full repeal of the limitation on itemized deductions and the personal exemption phase-out was scheduled to expire after 2010. But these were extended for two years through December 31, 2012.
Payroll Tax Cut: Beginning with their first paycheck in 2011, employees will get a 2% reduction in their Social Security tax from 6.2% to 4.2% up to the taxable maximum of $106,800. This one year payroll cut replaces the Making Work Pay credit, which is scheduled to expire after 2010.
Education Benefits: The American Opportunity Tax was scheduled to expire after 2010. It has been extended through 2012. The credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25% of the next $2,500 for a total maximum credit of $2,500 per eligible student per year. It is available for the first four years of a student’s post secondary education. The Act extends, through 2012, the enhanced above the line Student Loan Interest Deduction. $250 deduction for educator expenses has been extended through 2011.
Bonus Depreciation & S179 Expensing: Bonus depreciation is extended through December 31, 2012 and increased from 50% to 100% for qualified assets placed in service after September 8, 2010 and before January 1, 2012. The Small Business Jobs Act provided for Section 179 of $500,000, with a $2 million threshold amount for taxable years beginning in 2010 and 2011.
Self Employed Individuals: In general, self employed individuals can claim a deduction for qualified health insurance costs for income tax purposes but not for self-employment taxes. The 2010 Small Business Jobs Act temporarily allows the income tax deduction for the cost of the insurance in calculating net earnings from self-employment for purposes of self-employment taxes and applies to year 2010 for most individuals.
Estate Tax: The estate tax exclusion is set at $5 million and the top tax rate at 35%. These amounts are good through 2012.
1099s for Rental Property: Small Business Jobs Act of 2010 requires landlords to report payments of $600 or more to each service provider during the year to IRS on Form1099-MISC. So beginning January 1, 2011, rental property owners must obtain the name, federal tax identification number (or Social Security Number) from all individuals and businesses that provide service to your property such as gardeners, painters, etc.
For any additional questions, please go to www.irs.gov
Parveen Maheshwari is a Certified Public Accountant. He can be reached at 650-340-1400 or parveen@cpamax.com