Highlights of Federal & CA income tax law
changes for 2010 & 2011
updated 7/15/2011
Provisions affecting business owners:
Section 179 limits – The maximum deduction for equipment which can be expensed under Section 179 has increased to $500,000 for equipment placed in service in 2010 or 2011 (up from $250,000 for equipment placed in service in 2009), but the limit is lowered to $125,000 for 2012. There is a $2,000,000 investment limit which means that companies which place in service equipment in excess of this amount begin to lose the Section 179 deduction.
Standard Mileage Rate – For 2010, the standard mileage rate for business use of a car, van, pick-up or panel truck is 50 cents per mile. You also have the option of deducting the actual expenses incurred in operating the business vehicle including depreciation instead of taking the standard mileage rate.
Self-Employed Health Insurance Deduction – Prior to 2010, eligible self-employed individuals could deduct the cost of health insurance premiums. However, prior to 2010 this was only a reduction of income tax liability and did not reduce social security self-employment tax liability. In 2010 the amount deducted for self-employed health insurance will also also reduce the amount subject to the 15.3 percent social security self-employment tax. Premiums paid for health insurance covering the taxpayer, spouse and dependents qualify for this deduction (as of March 30, 2010 premiums paid for coverage of an adult child under age 27 also qualify even if the child is not the taxpayer’s dependent). The insurance plan must be set up under the taxpayer’s business & the taxpayer cannot be eligible to participate in an employer-sponsored health plan.
College tuition tax credit:
American Opportunity Credit – For the 2009 & 2010 tax years there is a credit of up to $2,500 per student for each year for the cost of tuition, books & other course materials. The credit is for 100% of the first $2,000 plus 25% of the next $2,000 paid for tuition and other expenses on behalf of you, your spouse or dependent child. There is a phaseout of the credit for certain higher income taxpayers. The new credit is an improvement over the existing Hope credit for the following reasons: 1)you can claim the credit for 4 years instead of just 2 2)the cost of books is now included 3)if the credit exceeds your income tax liability, 40% of it is a refundable credit 4)it is exempt from alternative minimum tax limitations.
Estate and gift taxes:
Estate tax exemption – The estate tax exemption is $5,000,000 for 2011. There is no provision for estate taxes for 2010 which also means that assets inherited in 2010 do not receive a stepped-up basis. However, there is an election available under the recently passed legislation to apply the 2011 exemption (& thus the stepped-up basis) to assets inherited in 2010. If you received an inheritance and/or your spouse died in 2010 you should definitely consult with your tax advisor since this election could have a major impact on the income tax you will pay on any future sale of the inherited assets.
Annual gift tax exemption – The gift tax exemption remains at $13,000 for 2010. A married couple can give a combined gift of $26,000 to any person (by using each of their exemptions) exempt from gift tax & the requirement of filing a gift tax return.
IRA and 401(k):
Roth IRA conversions – There is no longer any limitation (due to AGI over limit) on who can convert their traditional IRA to a Roth IRA. This new rule effectively allows high income taxpayers to utilize the Roth IRA since they can contribute to a Traditional IRA & then convert the funds to a Roth. Conversions are taxable at the taxpayers regular tax rate. For conversions made in 2010 only, the tax can be spread over 2 years (2011 & 2012).
Charitable donation of IRA – If you are age 70½ or older you can donate up to $100,000 of your IRAs to charity without having to report the withdrawal as income and you will be able deduct the donation as a charitable contribution (not subject to AGI limit on charitable contributions or the phaseout of itemized deductions). The donated amounts count toward the required minimum distribution.
Homebuyer credits:
Federal Homebuyer Credit for 2010 – If you buy a home by April 30, 2010 (escrow must close by September 30) you may qualify for the credit. For 2010 the credit applies to first-time homebuyers (those who have not owned a residence in the United States in the last 3 years) as well as long-time residents (those who lived in main home 5 consecutive years out of last 8 years). The credit for first-time homebuyers is 10% of the purchase price up to a maximum $8,000 tax credit & the credit is a refundable tax credit which means that you will receive a refund on your tax return even if the credit exceeds your tax liability. For long-time residents the credit is 10% of the purchase price up to a maximum of $6,500 and is not a refundable credit. Homes over $800,000 purchase price do not qualify for the long-term residents credit. You have the option of claiming the credit on either your 2010 or 2009 tax return (if you have already filed 2009 you can still file an amended return to get the refund). There is a phaseout of this credit for higher income tax payers as well as potential alternative minimum tax (AMT) limitations, so consult with your tax advisor re: your particular situation.
California Homebuyer Credit for 2010 – There is a tax credit available for first-time homebuyers as well as anyone who purchases a new home after May 1, 2010. The credit is 5% of the purchase price up to a maximum $10,000 tax credit, but the credit is a non-refundable tax credit which means you will not receive a refund on your California tax return to the extent the credit exceeds your tax liability & the credit must be spread over 3 years tax returns. There is a limit on how many of these credits will be awarded and there is an application process involved so consult with your tax advisor re: the specific requirements involved.
Federal Homebuyer Credit for 2009 – A first-time homebuy who buys a home in 2009 or a long-term resident who buys a home after November 6, 2009 qualify. The credit for first-time homebuyers is 10% of the purchase price up to a maximum $8,000 tax credit & the credit is a refundable tax credit which means that you will receive a refund on your tax return even if the credit exceeds your tax liability. For long-time residents the credit is 10% of the purchase price up to a maximum of $6,500 and is not a refundable credit. Homes over $800,000 purchase price do not qualify for the long-term residents credit. You have the option of claiming the credit on either your 2009 or 2008 tax return (if you have already filed 2008 you can still file an amended return to get the refund). There is a phaseout of this credit for higher income tax payers as well as potential alternative minimum tax (AMT) limitations, so consult with your tax advisor re: your particular situation.
