So for now, the estate tax is 0% in 2010. This is unless Congress takes action before year-end.
What this means for 2011, however, is that the estate tax and the generation-skipping transfer tax (GSTT) are scheduled to
return. A talk with estate planners reveals a common consensus thinking that Congress will restore estate laws back to 2009
levels. This would allow a $3.5 million exemption for estate tax and GSTT with a 45% estate, GSTT, and gift tax rate. If,
on the other hand, we go back to pre-Bush Tax Law Changes, the exemption level would be only $1 million with a 55% estate,
GSTT, and gift tax rate.
5. With no estate tax in place for 2010, this means the
step-up basis rules have been replaced by carryover basis rules.
In 2010, any assets within an estate are subjected
to capital gains taxes rather than getting a step up as of the date of death. So if assets were bought over a period of time
(say 20 years), you’ll have to go back and find a paper trail to determine your cost basis. As a result, you may end
up paying capital gains tax on the appreciation if the estate is really large. Keep in mind, each estate can exempt $1.3 million
of gains from the carryover basis rule, and another $3 million exemption applies to assets inherited from a spouse –
so as much as $4.3 million of an estate can retain the step-up in 2010.
6. The federal gift tax rate
changes to 35% for 2010 from 45%.
There is still a gift tax in 2010 on gifts above the lifetime exemption
amount of $1 million. The tax liability is set for 35% for 2010. However, if you end up gifting less than $1 million during
your lifetime, you won’t have to worry about the gift tax at all.
7. No income limits on Roth
IRA conversions.
This is one of the major benefits in 2010 – anyone can convert a traditional IRA to a Roth IRA and they have the option of paying the taxes resulting from the conversion over two tax
years – 2011 and 2012. Keep in mind though, there are still income limits preventing certain taxpayers from actively
contributing to a Roth IRA, but there is no rule stopping you from making an IRA contribution in 2010 and then subsequently
converting that to a Roth.
8. You can no longer opt to
deduct state and local sales taxes on your federal return (for the moment).
Prior to 2010, you could choose to deduct
state sales tax payments instead of state and local income taxes. Congress let this option expire at the start of this year.
However, Sen. Maria Cantwell (D-WA) has been spearheading a provision to extend the state and local sales tax deduction –
so we have a chance that this option may return for tax year 2010.
9. Alternative Minimum Tax
(AMT) exemption amounts have significantly decreased.
Last year’s levels were adjusted for the economic stimulus
arranged by the Obama administration. Currently, AMT amounts are set as follows for tax year 2010:
- Single/Head of Household: $33,750
- Married Filing Separately: $22,500
- Married Filing Jointly: $45,000
10.
Business mileage deduction rates have been decreased.
If you use a personal vehicle for business purpose, be aware that
the business mileage deduction is now 50¢ a mile in 2010 (9 percent lower than the 55¢ per mile figure from 2009).
11. The favorable charitable
option that allowed you to donate money from your IRA tax free has expired as of December 31, 2009.
This
may come back if Congress restores this option. It gave IRA owners a big incentive (tax avoidance) to give money to charities
that desperately need funding.
12. No more excluding unemployment benefits from your
taxable income.
In 2009, you could exclude up to $2,400 of unemployment benefits. In 2010, there are no tax
breaks for unemployment benefits.
13. No higher education tuition deduction for 2010.
In 2009, some qualifying taxpayers could take
an above-the-line deduction for college tuition and expenses. If your AGI was $65,000 or less ($130,000 for joint filers),
the limit of the deduction was $4,000. Taxpayers with AGI up to $80,000 ($160,000 for joint filers) could take a reduced deduction
of as much as $2,000. But not in 2010 …not so far, anyway.
14.
Section 179 Expense Deduction due to be Phased Out.
The increases
in the Section 179 Expense Deduction, first introduced by President Bush in 2008, phases out completely in 2010. Small business
had been able to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property
placed in service during 2009. In 2010, this limit is due to drop to $135,000.
15.
Payroll Tax Changes.
The maximum amount of wages subject to Social Security tax will remain the same as 2009 at $106,800. As in prior years, there is no limit to wages
subject to the Medicare Tax; therefore, all covered wages are still subject to the 1.45% tax. The FICA tax rate, which is
the combined social security tax rate of 6.2% and the Medicare tax rate of 1.45%, remains at 7.65% for 2010. The maximum social
security tax that employees and employers will each pay in 2010 is $6,621.60. 16.
Educator expenses eliminated.
Teachers will no longer be allowed to deduct
out of pocket expenses incurred for school supplies. In the past, a deduction from adjusted gross income of up to $250 was
allowed.
17. Phase outs eliminated.
In 2010, there will be no phase out of itemized deductions or personal exemptions. This change will greatly benefit
high income earners.
18. Unemployment income fully taxable.
In 2009, those receiving
unemployment benefits can exclude up to $2,400 from their taxable income. This tax benefit will no longer be available in
2010.
19. Charitable distributions / contributions inclusion.
Charitable distributions
made directly from an IRA account to a qualified charity will no longer be excluded from your income.
20. Retirement contributions remain unchanged.
There is no change in the maximum contribution and individual can make to a 401(k) plan in 2010. This remains at
$16,500. The catch up contribution of $5,500 for individuals age 50 + also remains the same.
CHECK BACK FOR MORE CHANGES FOR 2010
