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Changes to Personal Income Taxand Business Tax LawsB Y G I N A A N D E R S E N , H A Y A S H I & W A Y L A N D A C C O U N T I N G A N D C O N S U L T I N G , L L P

On December 31, 2010, many of the

tax cuts that were implemented as

part of the Economic Growth and Tax Relief

Reconciliation Act of 2001 were set to

expire. Until mid-December 2010, taxpayers

didn’t know what taxes would look like in

2011. Would tax rates increase back to the

pre 2001 levels? Stay the same as in 2010?

Increase beyond pre 2001 levels? This

uncertainty caused many business owners

to wait until late 2010 to make important

business decisions such as whether or not

to hire additional employees or expand their

businesses.

On December 17, 2010, President Obama

signed the Tax Relief, Unemployment

Insurance Reauthorization and Job Creation

Act of 2010 (TRA 2010), which gave us

some certainty in tax planning for the next

two years. Most of the provisions in the bill

expire at the end of 2012 right after the

presidential election, which may result in

another interesting year for planning.

TRA 2010 had dozens of provisions

covering a variety of issues affecting

individuals as well as businesses. Following

are some of the more significant provisions

that might affect you and/or your business.

Individuals

Individual tax rates were scheduled to

revert from their 2010 levels of 10, 15, 25,

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28, 33 and 35 percent to pre 2001 levels

of 15, 28, 31, 36, and 39.6 percent. This

would affect all taxpayers at all levels of

income. Fortunately, the 2010 tax rates were

extended for two years until 2012. President

Obama has said he will make the sunset

of the two highest brackets an issue in the

2012 presidential campaign.

Without any action, maximum capital

gains rates were set to rise from 15 percent

(0 percent for taxpayers in the 10 and 15

percent income tax brackets) to 20 percent

in 2011. TRA 2010 extended the 15 percent

maximum capital gains rate thru 2012.

Qualified dividend rates were scheduled

to rise from a maximum of 15 percent to

a maximum of 39.6 percent. TRA 2010

extended the 15 percent rate for two years

until December 31, 2012.

Prior to 2006, itemized deductions

normally allowed were required to be

reduced by up to 3 percent of the taxpayers’

adjusted gross income for individuals with

income above $166,800. These deductions

include, among other items, charitable

contributions, mortgage interest, and

property taxes. Between 2006 and 2010,

this reduction was phased out until it was

eliminated in 2010. In 2011, it was scheduled

to return in full, meaning the allowable

portion of these deductions would once

again be reduced. TRA 2010 extends the

repeal of this deduction limitation for two

years.

Before 2010, high income individuals

were also subject to the personal exemption

phase-out whereby the personal exemption

was reduced for taxpayers over a certain

income threshold. The personal exemption

is $3,700 for 2011 and is a deduction every

individual gets against their income unless

they qualify for the phase-out. In 2010,

this phase-out was repealed, but set to be

reinstated in 2011. TRA 2010 extends the

repeal of this phase-out for two years.

TRA 2010 provides a patch to the

Alternative Minimum Tax (AMT) intended

to prevent the AMT from encroaching on

middle income taxpayers. Without this

patch, married couples filing a joint return

with income in excess of $45,000 would

have possibly been subject to the AMT. TRA

2010 increases this amount to $72,450 for

married taxpayers filing jointly.

One unique addition to TRA 2010

reduces the employee share of the Old Age,

Survivors and Disability Insurance (OASDI)

tax from 6.2 percent to 4.2 percent for

wages earned in 2011 up to the maximum

taxable wage base of $106,800. Typically

6.2 percent is withheld from employees’

wages for their portion of the OASDI. The

employer also contributes 6.2 percent to

OASDI on the employees’ behalf. In 2011, the

employer amount remains the same, but the

employee amount is reduced. This can result

in a decrease in employee taxes of up to

$2,136 for the year. This also applies to self

employed individuals, who typically pay self

employment tax for OASDI of 12.4 percent

reducing that amount to 10.4 percent.

Businesses

In September 2010, the Small Business

Jobs Act was signed which extended

bonus depreciation through 2010. Bonus

depreciation allows for 50 percent of the

purchase cost of qualifying new property

to be deducted in the year of purchase.

TRA 2010 boosts the 50 percent to 100

percent for qualifying new property placed

in service after September 8, 2010 and

before January 1, 2012. This provision is

one of the most expansive for businesses. It

is not limited to use by smaller businesses

or capped at a certain dollar amount. If a

business purchases 20 new tractors for a

total of $2,000,000 between September

9, 2010 and December 31, 2011, they can

deduct the entire $2,000,000 in that year.

Several tax credits and incentives that

expired at the end of 2009 or were set to

expire in 2010 were also extended by TRA

2010. Those include the Research Tax Credit,

the Work Opportunity Tax Credit, Credits

for biodiesel and renewable diesel, energy

efficient appliance credit, and the credit to

individuals for qualified energy efficiency

improvements to their personal residence.

TRA 2010 gives us some much needed

certainty for the next two years if no

further legislation is passed. With that

said, there will probably be additional tax

legislation coming in the next two years

as these slowly expire. Portions of the

Patient Protection Act are already being

challenged in the courts and by lawmakers.

As a business owner, all this uncertainty and

continual change makes it imperative that

you keep up on the latest laws in order to

make prudent business decisions. CG

If a business purchases 20 new tractors for a total of $2,000,000 between September 9, 2010 and December 31, 2011, they can deduct the entire $2,000,000 in that year.