As you all probably have heard by now, a new tax act was enacted. The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate and gift tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. We have listed some of the key elements below. However, we first want to bring to your attention a couple items, not from the new tax act, regarding requirements for making tax payments electronically for the upcoming new year.
Elimination of Federal Tax Deposit Coupons
As of January 1, 2011, the Internal Revenue Service will stop processing payments that are made generally at your bank with federal tax deposit coupons. These payments are typically business income tax payments and payroll tax payments. These payments now have to be made through the Electronic Federal Tax Payment System (“EFTPS”). In an effort to make the transition from the coupons to EFTPS smoother, those that previously used tax coupons should have received notification of pre-enrollment into EFTPS. If you do not make a tax payment electronically through this system a penalty of 10% of the payment will be charged. More information on EFTPS can be found on its website at www.eftps.com.
California Mandatory Electronic Payment for Certain Individuals
Also starting January 1, 2011, California will start charging penalties for individuals who are not making their California income tax payments electronically and are required to do so. The penalty is 1% of the payment amount. An individual is required to make California income tax payments electronically if the individual’s total tax liability was greater than $80,000 or made an estimated tax payment or extension payment greater than $20,000 since January 1, 2009.
Key Elements of the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”.
- The current federal income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
- Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
- A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.
- Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.
- Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
- Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit.
- After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. For gifts made after December 31, 2010, the gift tax will be reunified with the estate tax such that the $5 million exemption will also be available for gifts. Estates of people who died in 2010 can choose to follow either the rules that have been in place for 2010 or those that will be in place for 2011.
- Omitted from the new law: Repeal of a controversial expansion of Form 1099 reporting requirements.
The above highlights are only selected key elements of a complicated and extensive tax act. Before making any decisions in regard to this tax act, you should discuss your specific tax situation with us to make sure these general elements apply to your specific tax situation.
We hope this information is helpful. If you have any questions, please give us a call.
Happy Holidays and wishing you a very prosperous New Year!
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed in this communication.