McKonomics

New Law Extends IRA Donation Tax Break: Can You Benefit?

There's good news if you've reached age 70 1/2, and you have an IRA and philanthropic inclinations. Through 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 resurrected the opportunity to make cash donations to IRS-approved charities directly out of your IRA.

Such qualified charitable distributions are federal-income-tax-free, but you get no itemized charitable deduction on Form 1040. But that's okay. The tax-free treatment of qualified charitable distributions equates to an immediate 100 percent deduction, since the otherwise-taxable IRA dollars are sent directly to charity.

Here is a detailed explanation of the qualified charitable distribution privilege, which was extended in the latest tax law.

Take Advantage of Business Credits Even if You Didn’t Have Taxable Income in 2010

The general business credit is composed of several different credits which can be used to offset the tax liability imposed on a taxpayer in any given year. Some of the many credits that a taxpayer may take advantage of are: the credit for increasing research activities, low-income housing credit, renewable electricity production credit, biodiesel and renewable diesel fuels credit, and the new hire retention credit. 

Typically, the general business credit is only allowed to offset the income tax liability for a particular tax year, and is subject to an annual limitation based on tax liabilities. Plus, only certain specified credits are allowed to offset part or all of the alternative minimum tax (AMT). Unused general business credits may generally be carried back one year and forward for twenty years. 

New Law Includes Fresh Batch of Favorable Depreciation Changes

 The new Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act includes important depreciation changes for 2011 and 2012 that will benefit both small and large businesses. Even better, the best change is retroactive to the last part of 2010. The depreciation changes made by the new law are layered on top of changes made by last September's Small Business Jobs Act. 

Here is how your business can benefit from the two laws. 

Bonus Depreciation Liberalized and Extended 

The Small Business Jobs Act allows 50 percent first-year bonus depreciation for qualifying new (not used) assets placed in service in calendar year 2010. (Used assets do not qualify.) The new law takes bonus depreciation to a higher level for the last part of 2010 and all of 2011. It also allows 50 percent bonus depreciation for 2012. 

IRS News and Updates

 Due to passage of the huge new tax law in mid-December, the IRS has announced that the tax season will start on time for many people, but other taxpayers need to wait until mid-to-late February to file their individual returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid-to late February to file as well.

That means affected taxpayers who were planning to file in January to receive an early refund will have to wait.

Reason: The last-minute law passed by Congress on December 17 didn't give the IRS time to get ready for the tax return filing season, which started a couple weeks later.

The IRS needs to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Strategic Estate Planning under the New Tax Rules

 The new tax cut extension package, which was signed into law on December 17, 2010, establishes a new (but temporary) estate and gift tax regime for 2011 and 2012. It also clarifies the situation for the estates of individuals who died in 2010. 

Here is a brief summary of the relevant estate and gift tax provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. 

Exemption and Tax Rate  

Important Tax Figures for 2011

 This table provides some important federal tax information for 2011, compared with 2010. Many of the dollar amounts are unchanged or have changed only slightly due to low inflation. Other amounts are changing due to legislation.

  
** Under a 2001 law, the estate tax exemption was gradually increased and the tax rate levied on estates decreased. For one year only in 2010, the estate tax was repealed.

New Tax Law Did NOT Repeal 1099 Reporting Requirements

 Despite efforts by some members of Congress, the burdensome 1099 reporting requirements for businesses and rental property owners were not repealed as part of the new law passed on December 17, 2010. And Congress has adjourned for the year so a repeal of the requirements will now have to wait for the new Congress to take up the issue in 2011. 

The new requirements were part of two laws passed in 2010: 

IRS Gives Employers Guidance on 2011 Withholding

 Employers must quickly get their payroll systems in line to account for the two percent cut in the Social Security tax for 2011. Congress passed the new law with just two weeks for employers to make changes. 

Shortly after the new law passed, the IRS issued instructions and new withholding tables. Employers should start using the new tables no later than January 31, 2011, according to the IRS.  "For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers' pay as soon as possible but not later than March 31, 2011," the IRS added. 

For more information and to see the tables, go to this link on the IRS website.

Tax Relief Act of 2010, A Decision in Time for the Holidays?

 The tree is decorated, the stockings are hung, and the holiday festivities are planned. However, there is still one thing left to do as 2010 is drawing closer to an end. Congress needs to make a final decision on the Bush-era tax cuts along with various other tax breaks that have been proposed.

Late on December 9, H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Tax Relief Act) was introduced into the senate. The following paragraphs contain only a summary of some of the most relevant provisions included in the bill which benefit individuals and businesses.

Currently, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 are set to expire, which means that individual tax rates will go back to the rates (15%, 28%, 31%, 36%, and 39.6%) that were in effect prior to the enactment of this act.

In addition, a number of other individual provisions are set to expire. The Tax Relief Act, if passed, will extend the current tax rates through 2012. Here are some of the highlights that will impact individuals:

- Income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33%, and 35%. 

- Itemized deductions for higher-income taxpayers are not reduced. 

- The personal exemptions of a higher-income taxpayer are not phased out when AGI exceeds an inflation-adjusted threshold.

Tax-Saving Moves for Individuals at Year End

 Even though New Year's Eve is just around the corner, there's still a little time left for year-end tax planning. If you move fast enough, a few eleventh-hour tax moves can cut your tax bill or increase a refund for the 2010 tax year.

Keep in mind that the "Bush tax cuts" are scheduled to expire December 31, 2010, thereby raising tax rates for some individuals in 2011. But a late reprieve from Congress could preserve lower rates for another year or longer. Until the uncertainty is removed, focus on what you can do now to reduce your 2010 liability.

Here are ten tax strategies to consider: