Andy Powers-A Professional who cares..About YOU!
Tax Update & Planning for 2010
Updates as of 26OCT2010-IRS just released tax rates for 2010- No definitive news yet as regards extension of 2001 tax act provisions; still scheduled to expire on 01/01/2011.
In 2001 the U.S. 107th Congress established changes to the income tax laws intended to stimulate the economy. In order to get this tax legislation passed, the provisions of this 2001 tax act contained what is referred to as a “sunset” provision, meaning that unless a future Congress extended the tax provisions, including the new marginal tax bracket rates, the law would revert to where it was prior to the 2001 tax changes.
So far, no U.S. Congress, including the existing 111th Congress has yet to either change of otherwise extend the provisions of the 2001 tax act, including the marginal personal tax provisions. This leaves a significant amount of uncertainty as regards tax planning for 2011, and given the hardships of the U.S. and global economy combined with anticipated changes in the 112th Congress based on the 2010 midterm elections, it is impossible to predict at this time what changes to tax legislation will, if any, be made either before the end of 2010 or early in 2011, retroactive to the first of the year.
Tax “experts” have been anticipating that the 111th Congress will make a last minute “extension” of the 2001 tax provisions before the end of the 2010 year, at least until anticipated changes can be studied.
Under existing tax law U.S. individuals have six (6) marginal tax brackets (%, 15%, 25%, 28%, 33% and 35%), with each of the six percentages being applicable based on the filing status of the individual. Unless the 2001 tax law is extended, the number of marginal rate brackets will revert to 5 (15%, 28%, 31%, 36%, and 39.6%) with each rate being applied at a much lesser income bracket range.
The IRS has just released the 2010 marginal tax brackets:
Single Individuals
10% on income between $0 and $8,375
15% on the income between $8,375 and $34,000; plus $837.50
25% on the income between $34,000 and $82,400; plus $4,681.25
28% on the income between $82,400 and $171,850; plus $16,781.25
33% on the income between $171,850 and $373,650; plus $41,827.25
35% on the income over $373,650; plus $108,421.25
Married Filing Jointly or Qualifying Widow(er) Filing Status
10% on the income between $0 and $16,750
15% on the income between $16,750 and $68,000; plus $1,675
25% on the income between $68,000 and $137,300; plus $9,362.50
28% on the income between $137,300 and $209,250; plus $26,687.50
33% on the income between $209,250 and $373,650; plus $46,833.50
35% on the income over $373,650; plus $101,085.50
Married Filing Separately Filing Status
10% on the income between $0 and $8,375
15% on the income between $8,375 and $34,000; plus $837.50
25% on the income between $34,000 and $68,650; plus $4,681.25
28% on the income between $68,650 and $104,625; plus $13,343.75
33% on the income between $104,625 and $186,825; plus $23,416.75
35% on the income over $186,825; plus $50,542.75
Head of Household Filing Status
10% on the income between $0 and $11,950
15% on the income between $11,950 and $45,550; plus $1,195
25% on the income between $45,550 and $117,650; plus $6,235
28% on the income between $117,650 and $190,550; plus $24,260
33% on the income between $190,550 and $373,650; plus $44,672
35% on the income over $373,650; plus $105,095
Estimated Income tax brackets for 2011 as adjusted for inflation
The following is an estimate of how the 2011 tax brackets may look for 2011 unless either the 2001 tax legislation is continued or changes are made:
Single Individuals
15% on income between $0 and $35,020
28% on the income between $35,020 and $84,872; plus $5,253
31% on the income between $84,872 and $177,006; plus $19,212
36% on the income between $177,006 and $374,860; plus $47,773
39.6% on the income over $384,860; plus $122,601
Married Filing Jointly or Qualifying Widow(er)
15% on income between $0 and $70,040
28% on the income between $70,040 and $141,419; plus $10,506
31% on the income between $141,419 and $215,528; plus $30,492
36% on the income between $215,528 and $384,860; plus $53,466
39.6% on the income over $374,860; plus $114,425
Older News:
As I predicted when the Economic Growth and Tax Relief Reconciliation Act of 2001 (the so called “Bush tax cuts”) were legislated, tax planning would be a nightmare in 2010. The reason is that the tax provisions passed by Congress were legislated as part of a bi-partisan reconciliation legislation that had a built in “sunset” provision, meaning that the law was temporary and effective January 1, 2011 that tax rates and provisions affected by the legislation would expire and return to their status prior to this legislation. Any extension or permanency was left to future Congressional action.
Between bailouts and other economic stimulus legislation, health care reform, cap and trade, etc. Congress, in their spare time, has been considering changes in tax legislation that it deemed appropriate. Although several legislative changes have been enacted or proposed and are likely to take effect January 1, 2011, the “Bush tax cuts” are in limbo, for political reasons. Although many of the 2001 Tax Act provisions lowered income taxes paid by corporations and more affluent individuals, the Act also reduced income tax rates on the lowest tax brackets and middle income families and individuals, as well as reducing the tax paid on investment income such as dividends and capital gains which is integral to the average middle income taxpayer’s saving strategy. Thus, although there is a lot of finger pointing in Congress these days, the fact is that it is politically unwise to even consider proposing legislation that could possibly be viewed as increasing taxes for lower or middle income taxpayers until after the November elections. That leaves us with two possibilities, either tax legislation will be rammed through by a lame duck Congress immediately after the election (resulting in a myriad of unintended results and confusion as we saw in 1977 and 1978) or a temporary extension of the 2001 tax laws will be enacted, leaving it up to those sitting in Congress to deal with in 2011. Many experts are predicting the latter, stating that there simply won’t be sufficient time to enact new tax legislation in 2010 to be effective January 1, 2011. This would most likely leave us with tax legislation passed in 2011 with an effective date being the date of enactment of the new tax statutes or said another way, a year where different tax laws applied to different dates during the year.
TAX PLANNING OPTIONS FOR 2010?
So as far as year end planning for your taxes, we are left in limbo and this can prove to be extremely costly. Let’s say that you had an opportunity to accelerate income into 2010 or defer deductions to 2011, absent the constructive receipt doctrine. If it were absolutely certain that tax brackets were going to increase effective January 1, 2011 then it may make good economic sense to accelerate income into 2010 and pay a lesser tax on the income; however if the effective date of any tax rate increase were to become effective at some later date either in 2011 or 2012, such a strategy would not make sense as it would mean the lost opportunity costs of having the use of the money. So for now at least, alternatives need to be considered in light of both possibilities with decisions and action postponed until the end of 2010. Although unfair to :we-the people” this is all about Democrat Congress seeking to make a campaign issue stressing that GOP support for changes intended to lower taxes on lower income persons is opposed by the GOP while stressing that the GOP insists on preserving tax legislation that is “perceived” as benefiting upper income taxpayers. I don’t know about you, but most low income persons pay no or very little income tax and this tax legislation affecting these taxpayers would have little or no affect on their personal disposable income or do anything to stimulate the economy. On the contrary, the majority of taxpayers, the so called “middle class” would suffer as these are the majority of the U.S. taxpayers and any increase in tax would definitely have an adverse affect on their disposable income and spending, thus will adversely affect the economy.
TAX CHANGES FOR 2010
So far, this is what we do know regarding changes in tax legislation for 2010 and future years.
- In August tax legislation was signed into law that will significantly impact multinational taxpayers seeking to mitigate double taxation of income using credits against income taxed in the United States for taxes paid to foreign taxing jurisdictions. The “script notes” version of this legislation is to create a matching principle that denies a foreign tax credit on income until it is subject to tax in the United States.
- Although Congress is considering legislation that will establish tax breaks for small companies, including changes to the “Bush tax cuts”, extending provisions set to expire in 2009 and the alternative minimum tax, it now appears likely that many of these provisions will be delayed until after the mid term elections.
- Much has been said as
regards the possibility of reviving the estate tax for 2010. Given the biggest
argument as pertaining to its Constitutionality, the more that Congress delays
action, the less likely it will be that any retroactive change would be made
for 2010. Accordingly, it is more likely than not that there will be a federal
estate tax for 2010. Now what exactly does this mean, besides mass confusion?
- For 2010 estates,
although there would not be a federal estate tax, heirs to the estate would
be faced with paying a capita gains tax when any inherited property was
sold. Put simply, instead of inheriting property such as a house, land,
stocks, art, etc. at the fair market value which was the rule when the
estate paid a tax based on the fair market value of the property at the time
of the decedent’s death, and then including a capital gain (or loss) on
their personal tax returns when the property was sold, persons who inherited
property are now subject to a capital gains tax based on the difference
between the amount for which it is sold and the amount paid (tax basis) of
the decedent. Although the capital gains tax is lower than the previous
estate taxes, this usually creates a problem as far as determining the
original tax basis of the decedent when the property was acquired or in the
case of real property, when improvements were made, unless the decedent kept
good records that were also passed to the person who inherited the property.
- Now there are adjustments to the basis that may be available. The executor of the estate may increase the tax basis of the estate assets by up to $1.3 million. This means that estates with a value of $1.3 million or less can still use the fair market value method of determining tax basis for capital gains purposes. Also, spouses whole inherit property may add an additional $3 Million to the basis. This all serves to mitigate the capital gains tax on the inheritance of small estates.
- For 2010 estates,
although there would not be a federal estate tax, heirs to the estate would
be faced with paying a capita gains tax when any inherited property was
sold. Put simply, instead of inheriting property such as a house, land,
stocks, art, etc. at the fair market value which was the rule when the
estate paid a tax based on the fair market value of the property at the time
of the decedent’s death, and then including a capital gain (or loss) on
their personal tax returns when the property was sold, persons who inherited
property are now subject to a capital gains tax based on the difference
between the amount for which it is sold and the amount paid (tax basis) of
the decedent. Although the capital gains tax is lower than the previous
estate taxes, this usually creates a problem as far as determining the
original tax basis of the decedent when the property was acquired or in the
case of real property, when improvements were made, unless the decedent kept
good records that were also passed to the person who inherited the property.
- Business that hire persons who after February 3, 2010 have a social security payroll tax exemption for 2010. This includes employees who were terminated but rehired providing that they did not work for over 40 hours during the 60 days prior to the date of rehire. This also includes persons who we previously independent self employed contractors hired by the company. Workers who were laid off but rehired need to complete a Form W-11 attesting to the fact that they did not work for more than 40 hours during the 60 days preceding the date of rehire.
- Corporations with less than $50 Million in assets will be subject to increased random IRS audits. The IRS will use the data collected in determining which companies and which industries will be audited in the future in an effort to minimize “no change” audits and focus resources toward audits of businesses with the greatest potential for collecting audit revenue.
- Looking to the future,
Congress is eying another revamping of the Internal Revenue Code, such as we
saw in 1986. Those provisions being considered are:
- Reducing the number of tax brackets from 6 to 3. Couples would pay 15% on their taxable income up to $75,000, 25% for the next $65,000 and then 35% after that. The brackets for singles would be half that of married persons. As for persons who file married filing separately, we need to wait.
- Standard deductions will be increased significantly, causing many persons who now itemize to be able to file using the standard deduction. Married persons would be entitled to a standard deduction of $30,000. $15,000 for singles and $22,500 for married persons qualifying as head of households.
- Upper income taxpayers (many middle class) would no longer have itemized deductions and standard deductions limited based on their income, and alternative minimum tax MAY be eliminated.
- To offset the lost revenue from some of these benefits, Congress is considering creating a somewhat confusing method of computing tax on dividends and long term capital gains, which will cost middle income more taxes. Instead of taxing dividends and long term capital gains at the lower rate now in effect, a 35% exclusion up to the first $500,000 would be permitted, with the remaining amount subject to tax at ordinary income rates.
- Interest on Municipal bonds would no longer be tax exempt, which means that local governments may be hurt as well by having to pay a higher interest rate on monies borrowed for capital improvements and special projects. The proposed new law would provide for a tax credit of 25% of the amount of the interest.
- Many other changes are being considered, including tax breaks on Flex Plans, disallowing certain miscellaneous deductions, deferring interest on newly issued government savings bonds and once again, elimination of the foreign earned income exclusion.
I would like to add my personal opinion to the concept of another tax overhaul and especially the repeal of the Section 911 exclusion.
- For decades Congress has kicked around the concept of “tax simplification”; however the more Congress tries to simplify things the more complicated they make it. The overall state of the economy, excess government spending and politics always gets in the way of tax simplification. The IRS seems to want people to be able to prepare their own personal income tax return, however how can this ever be possible if the law keeps changing?
- As regards the foreign
earned income exclusion; for years bills have been submitted proposing that
the foreign earned income exclusion be eliminated. This is strictly political
and based on votes as members of Congress, and yes sometimes members of our
executive administration, often perceive this as a “tax loophole”, or at least
they try to sell it as such. The truth is that it was originally intended for
a specific purpose and that was to enable U.S. business, and today people
seeking employment on a global basis, to remain competitive in relation to
other businesses and persons from other countries. It is all about global
parity. The United States is one of the few countries that requires that
income form all global sources be included in a U.S. tax return regardless of
whether the person is residing in the United States. In order to avoid double
taxation and to encourage parity with workers from other countries, it
recognizes that the increased cost of living overseas must be taken into
account when compensating expatriate employees. This additional expense is
often included in the wages paid to expatriate employees, and is often subject
to tax by the local country (or taxing jurisdiction thereof) as well as being
included in the gross income of the U.S. income tax return. Of course not
every person is fortunate enough to work for a company that pays a foreign
service allowance.
- The Section 911 foreign earned income exclusion (FEIE) is intended to mitigate the additional living costs, and the resulting tax affect, making the U.S. worker more competitive in relation to employees of foreign countries. It is also intended to encourage U.S. employment overseas, which is not only good for American business and the economy, but also helps U.S. persons who are unable to find work here in the U.S. as well as increase their skills to companies here in the U.S. when they return.
- Denying the benefits of the FEIE is, in my opinion, a VERY BAD IDEA. Although it may have short term political affects as regards getting cotes from those who do not comprehend global business or economics, it would definitely have an extremely adverse economic affect on our global economic position. It is time that our elected officials stop using the U.S. Tax Code to enhance their popularity by selling this as a “tax loophole” and do what is right for the nation.