New Tax Law is a Windfall for Atlanta Taxpayers
Albert Einstein said it best, “The hardest thing in the world to understand is the income tax.”
The scary part about that quote was that it was written over 50 years ago and there have been numerous changes to the tax code since that time.
Another change to our illustrious tax code was enacted on December 17, 2010 when President Obama signed a multi-billion dollar tax cut package called the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 or the 2010 Tax Relief Act for short.
I usually don’t get too excited about tax cuts, but this one is a windfall for Atlanta taxpayers.
Individual Income Tax Rates
One of the first things that the 2010 Tax Relief Act did was to extend the Bush-era tax cuts for two more years through December 31, 2012.
What does that mean for the average taxpayer?
If the act hadn’t been passed, then the current tax rates (10%, 15%, 25%, 28%, 33% and 35%) would have increased to 15%, 28%, 31%, 36% and 39.6%. This is a dramatic savings for all taxpayers across the board.
Capital Gains Tax and Qualified Dividends
The capital gains tax was scheduled to increase to 20% and the tax on qualified dividends was scheduled to increase but the 2010 Tax Relief Act extended the 15% preferential tax on capital gains and qualified dividends until December 31, 2012.
Another less publicized benefit is that if you are in the 10% or 15% tax bracket, then you pay ZERO tax on your capital gains or qualified dividends.
How does that work?
To the extent that capital gains and qualified dividends, when added to other taxable income, do not exceed the top of the 15% tax bracket ($34,500 for single filers or $69,000 for joint filers in 2011), those capital gains and qualified dividends are subject to a ZERO tax rate. This is truly beneficial for young adults or retirees who might be living off of qualified dividends or stock sales. Another great idea would be to gift appreciated stock to your younger children so that they can sell the stock and effectively pay ZERO tax on the sale.
Itemized Deductions and Personal Exemptions
Before 2010, if you were a high-income taxpayer, then a portion of your itemized deductions and personal exemptions were reduced which resulted in you paying more income tax. This was repealed for tax year 2010 as part of the Bush-era tax cuts and was scheduled to come back in 2011.
However, the 2010 Tax Relief Act extended the repeal of the itemized deduction phase-out and personal exemption phase-out for high-income taxpayers through December 31, 2012.
This means that you will receive the full benefit of all your itemized deductions for tax years 2010, 2011, and 2012. You will also receive 100% of all your personal exemptions no matter how much money you earn in 2010, 2011, and 2012.
Payroll Tax Cut
The FICA tax (also known as Social Security) is a tax levied on both the employer and employee when the employee has earned income. The FICA tax is calculated as 6.2% for both the employer and employee on the first $106,800 of taxable wages. Self-employed individuals pay both the employer and employee share of FICA or 12.4% on their self-employment income.
The 2010 Tax Relief Act reduces the employee share of the FICA tax from 6.2% to 4.2% for every single taxpayer who has earned income up to the $106,800 wage base for 2011 only. For self-employed individuals, their maximum FICA tax would be 10.4%. This is by far my favorite of the new acts because everyone will save some tax dollars no matter how much they earn. For example, if you earn $100,000, then you would save $2,000 in FICA tax and if you earn $150,000, then you would save $2,136 in FICA tax ($106,800 x 2%).
Alternative Minimum Tax
The 2010 Tax Relief Act provided an AMT “patch” intended to prevent the AMT from affecting middle-income taxpayers. The 2010 Tax Relief Act increased the AMT exemption amount for 2010 to $47,450 for single filers and $72,450 for married taxpayers filing jointly. Without the patch, which had expired at the end of 2009, millions of taxpayers would have been subjected to AMT. For 2011, the AMT patch increases to $48,450 for single filers and $74,450 for married taxpayers filing jointly.
Child Tax Credit
The 2010 Tax Relief Act extends the $1,000 per child tax credit through December 31, 2012. This credit would have reverted back to $500 per child if Congress hadn’t added this to the new law. Unfortunately, not everyone can take advantage of the child tax credit. If you are married and file jointly and your income is greater than $110,000, then you start to lose some or all of the credit. Also, the qualifying child must be under age 17 at the end of the year and satisfy relationship, residency, support, citizenship, and dependent tests.
Gift and Estate Tax
After a one year hiatus, the Federal estate tax is back again in 2011. Most practitioners were shocked that it had taken this long. Although it is bad that we have an estate tax again, the great news is that the estate and gift taxes have been unified again. Husbands and wives will each have a $5,000,000 exclusion or a $10,000,000 combined exclusion, and the top gift and estate tax rate is 35%. However, this is only a temporary benefit and this portion of the law is scheduled to sunset on December 31, 2012.
If you are concerned that you or your loved ones might have a future estate tax problem, then you must act within the next two years to take advantage of this great opportunity to save your heirs a significant amount of estate tax.
Conclusion
I have only touched on a few of the recently enacted laws that I found beneficial to most Atlanta taxpayers. There are a whole host of tax extenders, credits, and business incentives that were a part of the 2010 Tax Relief Act. Please consult your tax advisor to take advantage of these truly tremendous tax savings.
Jonathan D. Swartz, CPA, PFS, CFPÒ is a shareholder at the Atlanta tax, accounting, audit and consulting firm of Bennett Thrasher PC and can be contacted at jswartz@btcpa.net. He serves as the Co-Chair of the Jewish Federation of Greater Atlanta’s Balser Symposium to be held on February 4, 2011.
Jonathan D. Swartz, CPA, PFS, CFP
