Janell A. Israel & Associates
1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817
January 2011 Tax Newsletter
What's new in taxes:
Congress Extends Bush-era Tax Cuts For Two Years
After weeks of wrangling over the details, both the Senate and the House passed a bill that will extend the tax rates in effect in 2010 for another two years. President Obama signed the "2010 Tax Relief Act" into law on December 17, 2010.
Here's an overview of the key provisions in the law.
* Tax rates. The existing tax rates established in the 2001 and 2003 tax laws will continue for all taxpayers through 2012. This means the top tax rate for 2011 and 2012 will remain at 35% instead of reverting to 39.6% as it would have done had the "2010 Tax Relief Act" not passed.
* Capital gains and dividends. The top rate for long-term capital gains will remain at 15% for taxpayers in all but the two lowest ordinary income brackets; those taxpayers will continue to have a 0% rate on capital gains. Dividends will continue to be taxed at the 15% and 0% rates instead of reverting to ordinary income rates as high as 39.6%.
* Itemized deductions and personal exemptions. Higher-income taxpayers will not have their itemized deductions limited and their personal exemptions phased out for another two years.
* Education tax breaks. The law extends the American Opportunity Tax Credit through 2012. The income exclusion for up to $5,250 of employer-provided education assistance to employees is continued for two years. The higher contribution limit of $2,000 and other enhancements to Coverdell Education Savings Accounts were extended for two years.
* Alternative minimum tax (AMT). The AMT was given another "patch" for 2010 and 2011, a move that will keep the tax from hitting millions more taxpayers. For 2010, the exemption amount is $47,450 for individuals and $72,450 for married couples filing joint returns. For 2011, the exemption is $48,450 for singles and $74,450 for couples. Without this adjustment, the exemption amounts for 2010 and 2011 would have been $33,750 for singles and $45,000 for couples.
* Payroll tax. A new tax break is created for workers who pay social security taxes. For 2011, the employee rate for social security tax is cut from 6.2% to 4.2% on wages up to $106,800. Self-employed individuals will pay 10.4% on self-employment income up to $106,800. Employers will continue to pay 6.2% on employee wages. This payroll tax rate cut does not affect the Medicare portion of payroll taxes for either employees or employers.
* Extenders. Tax breaks that have come to be called "extenders" because they're typically extended retroactively every year, but just for a year, are again extended by the new law. Effective for 2010 and 2011 returns, taxpayers have the option of deducting state and local sales taxes instead of state and local income taxes. The deduction for up to $4,000 of higher education expenses and the deduction for teachers who buy classroom supplies are extended. Those age 70½ or older may again contribute up to $100,000 tax-free from an IRA to a charity.
* Other provisions. The law extended several tax breaks for businesses, set the estate tax top rate at 35% with a $5 million exclusion, and extended unemployment benefits for 13 months.
Do You Owe The "Nanny Tax"?
You might owe the "nanny tax," and if you overlook it, you could be hit with additional interest and penalties.
* What is the nanny tax? It's simply employment taxes on the wages you pay to certain domestic workers, such as babysitters or housekeepers. If you paid a domestic worker more than $1,700 in 2010, you may be required to report and pay social security and Medicare taxes on their wages. You might also owe federal unemployment tax.
* To whom does the tax apply? It doesn't matter what type of work is performed (gardening, babysitting, nursing, or general household chores). What does matter is whether your worker is considered to be your employee or an independent contractor. Independent contractors are typically self-employed and, therefore, exempt from the nanny tax. Generally, if you control how and when workers do their jobs, they're probably your employees. Independent contractors operate their own businesses. For example, a nanny who takes care of your kids in your home is probably an employee, but a day care provider who cares for many children is not.
Some employees are exempt. For example, you generally don't have to pay nanny taxes on wages paid to your spouse, your child under age 21, or any part-time employees under age 18. But there are exceptions, so you should check the rules carefully.
* Avoid penalties and interest. If you fail to pay the tax, you could be liable for interest and penalties on the tax owed, and possibly even a penalty for underpaying estimated taxes. You might also have obligations to pay state employment taxes.
If you hire someone to work in your home, it's worth contacting our office to discuss your tax obligations. January 31, 2011, is the deadline for sending W-2 forms to your workers if the nanny tax applies for 2010.
New Law Includes Business Provisions
The "2010 Tax Relief Act" includes several provisions that will affect businesses. Here are the highlights.
* 100% bonus depreciation. The new law increases the current 50% bonus depreciation to 100% for qualified business equipment purchases made from September 9, 2010, through December 31, 2011. 50% bonus depreciation will be available for purchases made in 2012.
* Section 179 expensing. The first-year expensing option was increased to $500,000 for 2010 and 2011 by the "Small Business Jobs act of 2010." The investment limit was set at $2 million. The new law just passed provides a $125,000 expensing limit for tax years beginning in 2012. The investment limit for 2012 is set at $500,000; both limits will be adjusted for inflation.
* Research tax credit. The research tax credit had expired at the end of 2009. The new law extends the credit retroactively through 2010 and 2011.
* Work Opportunity Tax Credit. The new law extends the Work Opportunity Tax Credit through 2011. It had been scheduled to expire after August 31, 2011.
What's New in Finances:
New Law Sets Estate Tax Rates And Exemptions
The 2001 tax law eliminated the estate tax for 2010. The tax was scheduled to return in 2011 with a 55% top rate and an exclusion amount of $1 million. Under the new law, the estate tax is retroactively reinstated for 2010 with a maximum estate tax rate of 35% and an exclusion amount of $5 million ($10 million for married couples). The new rate and exclusion amount will apply through December 31, 2012. Along with these changes, the new law reinstates the step-up in basis for inherited property.
For deaths occurring in 2010, estates have a choice between applying the estate tax with a step-up in basis to fair market value for estate property or no estate tax with a modified carryover of the decedent's basis.
The new law allows a surviving spouse to utilize the unused portion of the deceased spouse's estate tax exclusion amount, providing the surviving spouse with a larger exemption from the estate tax.
Under the new law, the gift tax maximum rate is set at 35%, with an exclusion amount of $5 million, effective through 2012.
Where You Hold An Investment Matters
You'll probably be doing a 2011 review of your investment portfolio for tax and rebalancing purposes. As part of your review, check to be certain you are holding your specific investments in the right type of account. Your goal is to hold investments that produce ordinary taxable income in tax-deferred accounts and to hold those that produce tax-free or tax-favored income in your regular taxable accounts.
Consider this situation. If you hold tax-free municipal bonds in a tax-deferred retirement account, you are "sheltering" interest income from taxes that never would be taxed in the first place. Withdrawals from the retirement account will be taxed as ordinary income at ordinary income rates, and that includes interest from the municipal bonds. The result is that normally tax-exempt earnings eventually become subject to income tax.
Another example: Long-term capital gains are taxed at lower rates than interest income. So investments generating interest might be better held in retirement accounts, while investments generating capital gains might be better held in taxable accounts. Remember, withdrawals from retirement accounts (other than Roth IRAs) are taxed at ordinary income rates even if the income comes from long-term capital gains.
Tax-deferred retirement plans should outperform an investment account that is exposed to annual taxation. But if you're not careful where you hold specific types of investments, you could end up with less rather than more income.
Take our annual "Are You Paying Attention" test
Exercise your brain by answering the following four questions?
1. What do you put in a toaster?
2. Say "silk" five times. Now spell "silk." What do cows drink?
3. If a red house in made from red bricks and a blue house is made from blue bricks and a pink house is made from pink bricks and a black house is made from black bricks, what is a greenhouse made from?
4. Without using a calculator: You are driving a bus from London to Milford Haven in Wales.
* In London, 17 people get on the bus.
* In Reading, 6 people get off the bus and 9 people get on.
* In Swindon, 2 people get off and 4 get on.
* In Cardiff, 11 people get off and 16 people get on.
* In Swansea, 3 people get off and 5 people get on.
* In Carmathen, 6 people get off and 3 get on.
You then arrive at Milford Haven. Without going back to review, how old is the bus driver?
Click for the answers.
1. Did you say "toast"? The answer is "bread."
2. Did you say "milk"? Cows drink water.
3. Did you say "green bricks"? Greenhouses are made from glass.
4. Don't you remember your own age? It was YOU driving the bus.
95% of people taking this test answer most of the questions incorrectly.
All information is believed to be from reliable sources, however we make no representation as to its completeness or accuracy. The information contained in this newsletter is provided by Mostad & Christensen, Inc. The information is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in this newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Mosted & Christensen, Janell Israel & Associates and NPC are separate and unrelated companies.
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