Clayton & McKervey, P.C.

Home

News & Events

Expiring Tax Provisions

Absent any tax law changes, beginning in 2011, many taxpayers will see an increase in their taxes. In 2001, during the Bush administration, tax cuts were passed that effectively lowered the marginal tax rate for all taxpayers. Now those cuts are expiring, presenting new challenges in tax planning.

Some of the more significant provisions for businesses and individuals set to expire over the next two years are:

Income tax rates

In 2011, income tax rates go back to pre-2001 rates. The 10%, 15%, 25%, 28%, 33%, and 35% tax brackets we've grown accustomed to will be replaced by 15%, 28%, 31%, 36%, and 39.6%. Additionally, the "marriage penalty" is back.

Capital gain tax rate

The tax rate on long-term capital gains will also be increasing in 2011, from its current level of 15% to 20%.

Dividend tax rate

Right now, qualified dividends are taxed at capital gain tax rates (currently capped at 15%). This provision is set to expire at the end of 2010, at which time dividends will be taxed as ordinary income and will be subject to the "new" higher individual graduated tax rate schedule with a top rate of 39.6%.

Estate tax

For one year only, 2010, the estate tax has been repealed. There is still talk on Capitol Hill that the estate tax could be retroactively reinstated for 2010 at the 2009 rates, however, this has not been a priority for Congress. If there is no congressional action, the estate tax will return in 2011 providing an exemption of only $1,000,000 and a 55% maximum tax rate.

Alternative Minimum Tax ("AMT") Exemption

The AMT exemption amount has decreased to $33,750 for individuals and $45,000 for couples. In 2009, this exemption was $46,700 and $70,950, respectively.

Bonus depreciation and Section 179

In 2009, small businesses received 50% bonus depreciation for qualified purchases of capital assets; this tax provision expired in 2009. The HIRE Act temporarily increased the IRC Section 179 deduction for 2010. This provision enables taxpayers to immediately expense certain qualifying assets acquired in 2010 up to $250,000. This deduction is subject to a phase out if more than $800,000 of assets are acquired during the year. This deduction is expected to decrease to $25,000 in 2011.

Miscellaneous

Other tax provisions that have expired or will be expiring include:

Increased standard deduction allowed for real estate taxes
Deduction for sales tax on the purchase of a motor vehicle
First time home buyer credit
Making work pay tax credit
Deduction for school teachers

Additionally, the child tax credit decreases from $1,000 to $500 after 2010.

Extender bills that would preserve some of the "Bush tax cuts" have been introduced in Congress, but are currently being stalled. As such, while tax planning generally centers around deferral of income and acceleration of expenses to reduce your tax burden, this may be the time when it may make sense to consider accelerating income and deferring expenses to take advantage of the lower tax rates available in 2010.

248.208.8860 | 2000 Town Center, Suite 1800 | Southfield, MI 48075