A lot more than an extension of the “Bush tax cuts”

By E. Lynn Nichols, CPA

On Dec. 17, the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The popular press reported at length on the extension of tax rates for all taxpayers and one of the political trade-offs for that . . . extension of unemployment benefits for an additional 13 months. But the Act contains 73 sections, and changes or extends important tax rules for every business and every individual taxpayer as early as 2010 . . . the year that is almost over! Many of the items addressed in the Act already expired as of Dec. 31, 2009, but are now renewed. We should probably refer to the Act as the “Extender and Renewal” Act.

More important than the specifics, the nature of the legislation . . . unfunded tax breaks for numerous special interests, coupled with highly publicized rate cuts and outright giveaways to the “middle class”. . . ought to be of great concern to CPAs. Not only do these 70 some odd provisions complicate the tax law beyond reason, they break a Congressional commitment to pay for such benefits with revenue raising measures. In this case, there are no provisions to increase revenue. It’s just a gaggle of giveaways that have an $800 billion negative effect on federal revenue. But that’s a political, not a professional, issue. As a tax professional, I need to be ready to work with the rule changes that affect 2010 compliance and 2011 planning.

So that you can answer your clients’ questions about which giveaways will benefit them, here’s a list of what should be the more common tax breaks. The list is not all inclusive. If your client is starting a business on an Indian reservation, or giving books to a school, or making rum in the Virgin Islands, you will need more than we give you here. You can download a copy of the Act from http://thomas.loc.gov and a comprehensive, section by section, explanation of the Act from http://www.jct.gov.

Changes affecting individuals

Individuals will be most affected by:

  • Extension of 2010 tax rates at inflation adjusted amounts for 2011 and 2012
  • Continuation of “marriage penalty relief” in lower tax brackets and standard deduction amounts
  • A 2% reduction in the employee’s portion of the “Social Security Tax,” adding an additional $1,000 to the cash wages of an individual earning $50,000 per year
  • Renewal of provision allowing non-refundable credits to reduce Alternative Minimum Tax and extension of inflation adjusted exemption amounts
  • Renewal of the estate tax with a new exemption amount . . . $5 million, a new maximum rate . . . 35%, integration of the gift tax exclusion with the estate tax amount, and an option to apply the new rules to the estate of an individual dying in 2010
  • Renewal of a provision allowing up to $250 deduction from gross income of a teacher for the cost of supplies purchased and used for his or her classroom work
  • Renewal of a provision allowing state and local sales taxes to be deducted in lieu of state income taxes;
  • Renewal of a provision allowing a charitable contribution from an IRA to be treated as non-taxable to the IRA beneficiary while satisfying the required minimum distribution requirement

Changes affecting businesses

Businesses will be most affected by:

  • Extension of bonus depreciation allowing a 100% current deduction for assets placed in service after Sept. 8, 2010 and before Jan. 1, 2012
  • Extension of 15-year recovery period for qualified leasehold improvements, qualified restaurant buildings, and qualified retail improvements
  • 2-year extension of the research credit . . . 2010 and 2011
  • Extension of a special income tax exclusion for “Section 1202 stock” acquired before Jan. 1, 2012 and held for at least five years
    • Section 1202 stock is stock in a small business corporation, acquired as original issue for cash, property, or services
    • A small business for this purpose is one whose assets do not exceed $50 million when Sec. 1202 stock is issued, and which is engaged in a trade or business
    • This provision should jump start investments in small businesses corporations
  • Extension or renewal of eleven different energy credits

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