Congress Delivers Tax Relief In The Nick of Time
Extended Tax Deductions
The central feature of the Tax Relief act is a two-year extension of the “Bush tax cuts.”
The Tax Relief Act restores the federal estate tax, retroactive to the beginning of 2010, but reduces the top rate to 35% and increases the exemption to $5 million. The act also revives the stepped-up basis rules that applied before 2010. Under those rules, inherited property generally receives a tax basis equal to the property’s date-of-death fair market value, which allows the recipient to sell the property without triggering capital gains taxes other than for postdeath appreciation. Gifts made in 2010 are still subject to gift tax at a top rate of 35%, with a $1 million lifetime exemption. For 2011 and 2012,
however, the gift and estate taxes are “reunified” — both apply at a top rate of 35% with a combined $5 million exemption (indexed for inflation in 2012). The generation-skipping transfer (GST) tax exemption is increased to match the estate tax exemption, but the GST tax rate for 2010 is 0%, increasing to 35% for 2011 and 2012. There are other important changes as well:
Election for 2010.
Under the estate tax repeal, modified carryover basis rules set the basis of most inherited property at the lesser of the deceased’s basis or the property’s fair market value. As a result, heirs selling appreciated assets would be liable for capital gains taxes, even if the appreciation occurred before they inherited the assets. Executors are allowed to allocate up to $1.3 million to increase the basis of estate
assets plus an additional $3 million for assets left to a surviving spouse.
For people who died in 2010, the act gives their estates two options: 1) calculate estate taxes using the new 35% top rate and $5 million exemption (with a stepped-up basis for all estate assets), or 2) elect to apply the law as it existed before the act — that is, no estate tax but a modified carryover basis regime.
For 2011 and 2012, the act makes the estate tax exemption (but not the GST exemption) “portable” between spouses. So, if a husband dies this year with an estate worth $2 million (and an election is made on a timely filed estate tax return), his wife’s exemption will include the husband’s unused amount ($3 million) for a total exemption of $8 million.
Portability allows spouses to make the most of their exemptions without using trusts. But this provision is scheduled to expire at the end of 2012, which limits its value. And, after the death
of the first spouse, a trust can allow appreciation to escape estate tax. For these reasons, a trust will likely still make sense in many situations.
Key business changes
The Small Business Jobs Act of 2010 (SBJA) extended 50% bonus depreciation, generally through Dec. 31, 2010. This provision allows businesses to immediately write off 50% of the cost of certain capital expenditures, such as tangible property with a recovery period of 20 years or less, computer software, water utility property and qualified leasehold improvement property.
The Tax Relief act increases bonus depreciation to 100%, generally for assets placed in service after Sept. 8, 2010, and before Jan. 1, 2012. Bonus depreciation drops to 50% in 2012 and is
scheduled to disappear in 2013.
The SBJA also increased the maximum Section 179 expense deduction for fixed asset purchases to $500,000 for 2010 and 2011. In addition, the SBJA increased to $2 million the level of qualified
property purchases at which the Sec. 179 deduction begins to phase out. Absent additional
legislation, the deduction was scheduled to drop to $25,000, with a $200,000 phaseout threshold,
in 2012. The Tax Relief act increases the 2012 figures to $125,000 and $500,000, respectively,
both indexed for inflation.
If you acquired fixed assets in 2010 or plan to do so this year or next, review bonus depreciation
and the Sec. 179 provisions to determine the most tax-efficient strategy for each year. Bonus
depreciation is available regardless of expenditure level, but only for new property. Sec. 179
applies to both new and used property. State rules differ for bonus depreciation vs. Sec. 179
in certain states.
How do you spell relief?
In addition to the changes described above, the Tax Relief act temporarily extends many expiring provisions. (See “Extended tax breaks” above.) Consult your tax advisor to discuss what
the act means for you and your business.
Extended tax breaks
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extends or
expands several individual income tax breaks through 2012, including: The act also extends, through 2011, these breaks that expired at the end of 2009: Extended business tax breaks include the:
The act also extends a variety of energy incentives for businesses and individuals.
Elimination of the personal exemption phaseout and itemized deduction limitation,
A modified child tax credit,
An increased dependent care credit, adoption credit and adoption assistance exclusion,
“Marriage penalty” relief, and A variety of education incentives, including expanded Coverdell Education Savings
Accounts, an expanded exclusion for employer provided educational assistance and an
expanded student loan interest deduction.
Deduction for state and local sales taxes in lieu of state and localincome taxes,
Higher education tuition deduction, and IRA direct charitable contribution.
R&D tax credit, which was renewed for 2010 and 2011,
100% gain exclusion for qualified small business stock held for five years or more, extended to stock acquired before Jan. 1, 2012,
Work Opportunity tax credit, extended through 2011, and 15-year depreciation for qualified leasehold improvement, restaurant and retail-improvement property, extended through 2011.
If you’re one of the lucky ones who are able to get out of bed, eat breakfast and walk to their office without ever leaving home, good for you! But are you aware of the IRS’s home office deduction rules?
Passing the test
According to the IRS, your workspace must meet certain tests to qualify for the home-office
Exclusive trade or business use.
You must have a specific area of your home used for only your trade or business. No personal use of the space is allowed.
You must use the area regularly and on a continuous basis.
Principal place of business.
The area must be your principal place of business or the place where you regularly meet or deal with customers. Using the space for administrative or management functions typically qualifies, too, even if a significant portion of your work is done in the field.
Your workspace doesn’t have to be an actual office or even a separate room in your home — only a defined space used for business. In fact, you don’t even have to use a portion of your home as an office. It can be any space, such as a storage facility or showroom, that you consistently use. Moreover, any areas you use to store inventory, files or documents, such as a closet or basement, are also eligible for the deduction if you use the space regularly.
Determining what to deduct
You can potentially deduct 100% of expenses directly related to the home-office space, including
your telephone line and utilities (if you have separate hookups), painting and repairs, and the cost
of an insurance rider on your homeowner’s policy. You’re also allowed to deduct a percentage of
indirect expenses that pertain to your home office, such as mortgage interest and property taxes, as well as association fees or condominium assessments. And if you don’t own your home, you can deduct some of your rent.
Other deductions include insurance premiums on the home, the cost of a security system, and bills for repairs, utilities, trash removal and general maintenance. Finally, you can depreciate the portion of the home used for business over a period of 39 years.
To determine the “home-office” portion of your residence, divide the square footage of your office by the square footage of your entire home. Then apply that percentage to each indirect cost to calculate the deduction you can claim.
Understanding these new rules and how it will affect your personally or your business, call us to see how our accounting services can assist you today!