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There are numerous Federal tax changes starting in 2010
Estate Tax Repealed
The federal estate tax will be eliminated for estates of individuals who die in 2010 unless Congress acts to reinstate it. For individuals dying after 2010, the federal estate tax returns with a $1,000,000 exemption and a 50 percent maximum rate. Congress is likely to take some action on these rules during 2010.
Roth IRA Conversions
Starting in 2010, individuals with any amount of modified Adjusted Gross Income are free to switch a traditional IRA to a Roth IRA. Conversions are fully taxable at your regular tax rate. For conversions in 2010, taxpayers can spread the tax due over two years. Half the tax will be due in 2011, and the remaining half will be payable in 2012.
The income ceilings for paying into a ROTH increases. The contribution phase out begins at Adjusted Gross Income of $167,000 to $177,000 for couples and $105,000 to $120,000 for singles.
State and Local Sales Tax Deduction
The opportunity for itemizers to choose to deduct their state sales tax payments instead of deducting their state and local income taxes ends after 2009, unless Congress extends it.
Educators' Deduction
This deduction for classroom supplies purchased by educators lapses after 2009, unless Congress extends it.
Tuition and Fees Deduction
The deduction for up to $4,000 of college tuition and fees expires after 2009, unless Congress extends it.
Direct Donations of IRAs to Charity
Beginning in 2010, the opportunity for IRA owners age 70½ to directly donate part of their IRA balance to charity will disappear, unless Congress extends it.
Income Earned Abroad
The maximum foreign earned income exclusion is increased to $91,500. This is a $100 increase from 2009.
Additional Standard Deduction for Property Taxes
Starting in 2010, non-itemizers will no longer be allowed to increase their standard deduction by up to $1,000 of property taxes paid, unless Congress extends this break.
Section 179 Expense Deduction
The maximum amount of equipment placed in service that businesses can expense drops by nearly 50%, to $135,000 from $250,000 previously.
Capital Gains Tax Rates
The tax rate on capital gains from the sale of assets held longer than one year remains at 0% for people in the 10 percent or 15 percent tax brackets. The 15 percent maximum tax rate on long-term capital gains for taxpayers in higher brackets also remains the same. However, these rates are scheduled to increase in 2011.
Dividend Tax Rates
Similarly, the special 5 percent maximum rate on dividends of taxpayers in the 10 percent and 15 percent tax brackets remains at zero percent through 2010.
Exemptions for the Alternative Minimum Tax
For 2010, the exemption levels drop to $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately. Congress can, however, act in 2010 to extend the relief that was available in 2009.
Partial Exclusion for Unemployment Benefits
For 2010, the first $2,400 of unemployment benefits you receive is no longer tax-free.
Sales Tax Deduction for New Vehicles
Beginning in 2010, buyers of new vehicles no longer get a tax benefit for sales tax paid on new vehicles, unless they itemize and elect to deduct sales taxes instead of state income taxes.
Credit for Energy-Saving Home Improvements
The 30 percent tax credit of the cost of energy-saving home improvements reverts to 10 percent after 2010, and is capped at $500.
Starting in 2011
Higher Tax Rates
Beginning in 2011, tax rates that were in effect prior to 2001 will return. The top income tax rate goes back to 39.6 percent, and the special low 10 percent bracket is eliminated. Whether this will actually happen will be at the heart of a spirited battle in Congress during 2010.
Increase in Capital Gains and Dividend Tax Rates
The tax rate reductions for long-term capital gains and dividends are scheduled to expire this year.
- In 2011, the maximum long-term capital gains tax rate goes back up to 20 percent from 15 percent. A lower 10 percent tax rate is used by individuals who are in the 15 percent tax bracket. Their long-term capital gains had been tax-free since 2008.
- In 2011, dividend income (other than capital gain distributions from mutual funds) is taxed as ordinary income at your highest marginal tax rate.
Child Tax Credit
The credit of $1,000 per eligible child reverts to $500 after 2010. After 2010, none of the child tax credit will be refundable to taxpayers unless their earned income is more than $12,550. This is one of the many Bush tax cuts currently scheduled to expire after 2010.
Section 179 Expense Deduction
The maximum amount of equipment placed in service that businesses can expense drops to $25,000, down from $135,000 in 2010.
College Savings Plans
Beginning in 2011, 529 Plans can no longer be tapped tax-free to pay for a computer or Internet access.
Tax Credit for College Tuition
The Hope credit is again limited to the first two years of college and is capped at $1,800. None of the credit is refundable if it is more than your regular income tax liability.
Earned Income Tax Credit (EITC)
Temporary increases in the Earned Income Tax Credit for filers with three or more children and the higher income levels for the phase out of the credit are repealed.
Mortgage Insurance Premiums
The special itemized deduction for mortgage insurance premiums paid on mortgages taken out after 2006 expires on Dec. 31, 2010.
Starting in 2013
Tax Relief for Taxpayers Who Lose Their Homes Due to Foreclosure Expires
Beginning in 2013, debt forgiven in connection with the foreclosure of a principal residence will once again be considered taxable income (unless you are in bankruptcy or insolvent).
There are numerous California tax changes starting in 2010
Estimated Payments Increase for 2010
The required quarterly payments are 30% for the first, 40% for the second, no amount for the third and 30% for the final fourth quarter.
Remit Payments Electronically for Certain Amounts
All tax payments must be remitted electronically if an individual meets any of the following thresholds:
- Installment payment exceeds $20,000; or
- Total tax liability exceeds $80,000
A 1% penalty for noncompliance will be applied to the amount paid.
Net Operating Losses Suspended for 2008 and 2009
Suspended net operating losses will be allowed in 2010. In addition, the losses will be allowed additional carryover periods of two years for 2008 suspended losses and one year for 2009 suspended losses. Additionally, the carryover period for net operating losses incurred in 2010 and on will be 20 years.
LLC Fee Prepay
LLCs must estimate and remit the LLC fee for the full tax year by June 15th.
Individual Income Tax Rates Increased
The 0.25% rate increase beginning January 1, 2009 is effective through December 31, 2010.
Several Banks No Longer Accept Federal Tax Deposit Coupons
A growing number of banks, including one of the largest, Bank of America, will no longer accept Form 8109 coupons for payment of federal tax liabilities. Financial institutions are citing the increase of paper processing costs as the reason for this change. Of course, we all know the real reason - the banks want to pay out ever higher bonuses.
Some banks are still accepting coupon payments for customers of the bank, but most are considering switching to electronic. Any business that still makes federal tax deposits using the paper Form 8109 coupon should be aware that their financial institution may soon stop accepting this type of payment. We recommend businesses be proactive and enroll in the EFTPS (electronic federal tax payment system) and the State electronic payments system.
Standard Mileage Rates
Beginning January 1, 2010, the standard mileage rates for the use of a car, van, pickup, or panel truck will be:
- 50 cents per mile for business miles driven
- 16.5 cents per mile for medical or moving purposes, and
- 14 cents per mile driven in service of charitable organizations
Form 1099 Compliance
The IRS is implementing an intensive program to ensure 1099 compliance. There are severe penalties for failure to file 1099 returns, as well as substantial penalties for incorrect filings. It is extremely important that you issue required forms 1099.
Form 1099 Reporting Requirements - Individuals, partnerships, corporations, or other organizations engaged in a trade or business are to file information returns (Form 1099). These forms are required to be sent to payees by January 31, 2010.
- Payments of $10 or more, relating to interest, stock dividends or distributions, royalties, unemployment compensation, state tax refunds, or original issue discount.
- Payments of $600 or more, for non-employee services, rent, providers of health and medical services, or liquidation distributions.
- Payments (regardless of the amount) for acquisition or abandonment of property secured for debt, broker or barter transactions, pension proceeds, proceeds from the sale or exchange of real estate, or distributions from an IRA are reportable.
- Payments made to corporations are generally not reportable. Exceptions: If, in the course of your trade or business, you paid attorney fees or gross proceeds to an attorney of $600 or more, it is reportable. Payments for medical and health services are also reportable.
- Banks and other businesses administering escrow accounts, including construction accounts, will be required to issue 1099-MISC for payments made on construction loans made after December 31, 1993.
We urge you to comply with these requirements and, as always, we are available to assist you in any way to comply with the requirements.
Penalty for Late Filing of a Partnership Return
For tax years beginning in 2009, the late filing penalty for a partnership return is $89 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year. No penalty will be imposed if the partnership shows that the late filing was due to reasonable cause.
For tax years beginning in 2010, the late filing penalty for a partnership return is $195 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year. No penalty will be imposed if the partnership shows that the late filing was due to reasonable cause.
Penalty for Late Filing of an S Corporation Return
If no tax is due, the late filing penalty for returns required to be filed after 2008 increased to $89 for each month or part of a month (up to 12 months) the return is late or does not include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year. The penalty change discussed in the preceding sentence also applies if tax is due. In addition, the minimum additional late filing penalty for returns required to be filed after 2008 that are more than 60 days late increased to $135 or the balance of the tax due on the return, whichever is smaller.
Gift Tax-The Basics
Who pays the gift tax?
The donor is generally responsible for paying the gift tax.
What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.
What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion (currently $13,000) for the calendar year.
- Tuition or medical expenses you pay for someone (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to a political organization for its use.
Are gifts deductible on the donor’s income tax return?
You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). However, making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax.
What if a married couple want to give away property that they own together?
Each spouse is entitled to the annual exclusion amount on the gift. Together, you can give $26,000 (effective on or after January 1, 2009).
What is the difference between a Will and a Trust?
A Trust is a way of transferring your property to an artificial legal entity or "person" (the Trust) before your death, while still having the use and/or control of it during your lifetime. There are two kinds of Trusts, revocable and irrevocable. If the Trust is revocable, you can change it or decide to take the property back any time during your life. If the Trust is irrevocable, you can’t change it once you have set it up. If you name yourself as the sole Trustee of your Trust during your lifetime, you will be able to manage the Trust while you are alive.
The Trust owns the legal title to the property in it while you are still alive, and since a Trust does not end at your death, it will still own the property when you die. You put instructions in the Trust for how the Trustee, or person controlling the Trust, should distribute the Trust property, and the Trustee will carry out those directions.
Only property owned by the deceased at the time of death has to go through the court process called “probate,” so the property in the Trust can be distributed without going through the probate process. Probate is the legal process which inherited property goes through in order to transfer the title of the property from the decedent to the beneficiary. If you have a large estate, or even a small estate with real property (i.e. real estate), it is often advantageous to set up a Trust, as it is usually far less expensive for your heirs when you die.
A Will is a document that transfers property to others after your death. Because you still own the property at the time you die, all the property transferred in the Will must go through the probate process, which is often slow and costly. Even people with Trusts sometimes have other property that is transferred by Will and has to pass through probate. Note: the first $100,000 of property is exempt from Probate.
So Who Pays Taxes?
Upper incomers continue to bear a record share of the income tax burden. The top 1% filers paid 40.4% of all federal income taxes, up from 39.9% in the previous year, according to IRS data for 2007, the most recent year available. Yet, those taxpayers made just 22.8% of the total reported adjusted gross income. The minimum level of AGI needed to be in the top 1% hit a new high - $410,100.
The highest 5% paid 60.6% of total income tax and made 37.4% of all AGI. They each had adjusted gross incomes of at least $160,000. The top 10% of filers, those who had AGIs of $113,000 or higher, bore 71.2% of the overall tax burden, garnering slightly more than 48% of the total adjusted gross income.
The bottom 50% of all filers paid just 2.9% of the total income tax bill. Their share is so low because Social Security taxes are not included in the figures and because many of them get substantial tax relief from the earned income credit.
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