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Monthly Client Newsletter | January 2011
T he "lame duck" session of Congress included the much anticipated Tax Relief Act of 2010 being signed into law on December 17th. So what does this tax law contain? Outlined here are some of the major provisions that impact your taxes in 2010 and beyond.
Contents
America Gets a Raise
| As part of the Tax Relief Act of 2010, Social Security tax rates will be lowered by two percent. The employee-portion of Social Security taxes will be reduced from 6.2% to a temporary rate of 4.2% for 2011 only.This 2% tax break also applies to self-employed individuals. Medicare taxes are unchanged, the employer-portion of Social Security remains 6.2%, and the Social Security wage base remains $106,800 for 2011. What it means: You could get a raise in your pay by as much as $2,136 in 2011. Unfortunately, for most clients this "raise" is offset somewhat by the expiration of the Making Work Pay Credit that expired in 2010. It also means you should be prepared for lower paychecks in 2012 as the Social Security tax rate goes back up. |
A Sneak Peek at 2011 Tax Rates
Tax
Rate | Income Level |
Single | Married Joint | Head of Household | Married Filing Separate | Estates & Nongrantor Trusts |
10% | | | | | |
15% | | | | | |
25% | | | | | |
28% | | | | | |
33% | | | | | |
35% | | | | | |
Individual Tax Rates Remain the Same:The passage of the 2010 Tax Relief Actretains the current tax rates through 2012.Without action, the 10% tax bracket would have been eliminated and the upper tax brackets would have increased 3 - 3.6%. In 2013, these higher tax rates (15%, 28%, 31%, 36% and 39.6%) will go into effect unless Congress acts.
Dividend and Capital Gains Tax Rates Remain the Same: Qualified capital gains and ordinary dividends will continue to be taxed at a maximum rate of 15%, with a 0% rate on capital gains for those in the 10 and 15% incom e tax brackets. Without the Tax Relief Act of 2010, the capital gains 0% rate would have risen to 10% and the 15% maximum rate would have risen to 20%. Dividends would have been taxed at ordinary income tax rates rather than the preferred 15% rate.
What it means: You now have a level of certainty for the next couple of years as to what the tax rates will be.In addition, a number of clients looking to adjust their portfolios due to the pending increase in the dividend and capital gains tax rates now have two more years to plan.
'Extensions' and Changes
What You Should Know With massivelegislative changes over the past nine months, outlined here are five key things you should know: |  |
 | Tax breaks extend into 2011. A number of tax breaks now extend into 2011. Key among them are: - $250 deduction for elementary and secondary school teachers' classroom expenses
- a continuation of the deduction for qualified tuition and related expenses
up to $4,000 - a charitable donation deduction for direct contributions from qualified retirement accounts if 70 1/2 years or older
- $1,000 Child Tax Credit that does not fall back to $500 as scheduled
- a choice between taking sales tax OR state income tax as an itemized deduction
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 | Roth IRA Conversions. Anyone can now convert IRAs into Roth IRAs by paying the tax, regardless of your income levels. However, you must be prepared to pay taxes on the amount converted in 2011.In 2010, this tax obligation could be spread between 2011 and 2012 tax years. |
 | W-2s now have health benefit reporting. Your 2011 W-2 will contain the value of health insurance benefits.While not yet taxable, the government wants to keep track of these values as part of the Health Care Reform Act. |
 | More 1099s. In an effort to capture unreported income, the Treasury Department is requiring more information reporting.This includes brokerage companies reporting the cost basis of stock transactions, merchant credit card companies reporting merchant business card activity, and small businesses issuing 1099s to many more suppliers. |
 | Phase-out reprieve. For many clients, itemized deductions and personal exemptions were phased out in prior years. After a hiatus in 2010, phase-out of deductions was scheduled to occur once again in 2011, but has now been delayed
until 2013. |
2011 Mileage Rates
Standard Mileage Rates | | Mileage | 2011 Rate/Mile | | Business Travel | 51.0¢ | | Medical/Moving | 19.0¢ | | Charitable Work | 14.0¢ |
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Is Cell Phone Insurance a Good Deal?
 Perhaps you received a new cell phone for Christmas. One with new 4G technology and a great data plan.Replacement costs for these new phones can run in the mid to high $100s.This cost is often hidden from you with new or upgraded calling plans because the providers "subsidize" the cost of the phone within your contract. Verizon, AT&T, Sprint, and T-Mobile all offer cell phone insurance through 3rd party insurance providers for many, but not all, the phones they carry. The insurance typically covers loss, theft, and damage (including water damage). This coverage supplements manufacturer's warranties that typically last up to one year. Depending on your service provider, the insurance on a cell phone costs around $5/month, with a deductible between $50-100. Should you buy insurance? Most experts recommend against purchasing this insurance due to the high expense and because many consumers are given a refurbished phone as a replacement (rather than a new phone).Here are some things to consider:  Consider coverage if you have a very expensive phone
Consider coverage for a young or "clumsy" family member who is not as careful with their phone Consider downgrading when you lose or destroy your high-priced phone.This downgrade is usually temporary as service providers often offer "discount" pricing on new phones that come out. Replace your damaged phone with a used phone.Early adapters are constantly trying to replace their cell phones with the newest and greatest offer. |
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Estate and Gift Taxes
Still Up in the Air? For the next two years (through 2012), the Tax Relief Act re-instates the estate tax after a one-year reprieve during 2010.The new maximum estate tax rate is 35% with an asset exclusion amount of $5 million.The law also re-establishes the "stepped up" basis rules that allow for transferring assets to heirs at their fair market value at time of death versus the historic value when they were originally purchased.This rule reduces potential capital gains when the beneficiary sells the inherited assets. |  |
| Estate Tax Recap | | Year | 2009 | 2010 | 2011-2012 | 2013+ (est.) | | Asset Exclusion Amount | $3.5 million | Unlimited | $5 million | $1 million | | Maximum Tax Rate | 45% | None | 35% | 55% | | Asset Value | "stepped-up" value | $1.3 million limit on basis valueadjustment ($3 million for spouse) | "stepped-up" value | "stepped-up" value |
What it means: While decedents know what the next two years will bring, after 2012 estate tax law will be filled with uncertainty once again.This lack of certainty complicates estate planning and makes for another potential election year debate. |
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