How the new US tax law affects you

22.12.2010

If you are a US taxpayer, here is a look at some of the new regulations‘ key elements.

This article is for you if you are a US taxpayer. The recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is a sweeping tax package that extends the Bushera federal tax cuts for two years, gives estate-tax relief, and includes a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here‘s a look at some of the key elements:

ESTATE TAX

The federal estate tax has been retroactively reinstated for decedents passing away in 2010 as well as 2011 and 2012, with a top rate of 35 percent. The exemption amount will be $5 million per individual ($10m. per married couple) in 2010 and 2011 and will be indexed to inflation in following years. The ‘‘stepped-up basis‘‘ for income-tax purposes has been reinstituted.

Estates of people who died in 2010 can make a special election, if desired, to follow the 2010 rules, which would exempt the entire estate from estate tax but would not give it the stepped-up basis for income-tax purposes. A more detailed article on this subject will follow in the coming weeks.

INCOME AND CAPITAL-GAINS TAX RATES

The current federal income-tax rates will be retained for two years (2011 and 2012), with a top rate of 35% (instead of 39.6%) on ordinary income and 15% on qualified dividends and long-term capital gains.

For non-corporate taxpayers, net long-term capital gains and qualified dividends continue to be taxed at a zero rate to the extent they would have been taxed at 10%, or 15% if they were ordinary income.

SOCIAL SECURITY BREAK

Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed on a maximum earned income of $106,800.

The Medicare tax rate remains the same: 1.45% for employees and 2.9% for the self-employed on the full earned income. The income-tax deduction for the self-employed will be increased to 59.6% of the Social Security tax and 50% of the Medicare tax.

AMT

A two-year Alternative Minimum Tax (AMT) ‘‘patch‘‘ for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.

TAX CREDITS

Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years. The refundable credit equals 15% of earned income in excess of $3,000.

It also extends rules expanding the earned-income credit for larger families and married couples, and it extends the higher-education tax credit (the American Opportunity tax credit) and its partial refundability for two years.

DEPRECIATION

Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010, and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.

TAX DEDUCTIONS

Many of the ‘‘traditional‘‘ tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include: the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the above-the-line deduction for higher-education expenses.

The new law retroactively reinstates for 2010 and 2011 the exclusion from gross income up to $100,000 of qualified charitable distributions directly from a regular Individual Retirement Account (IRA) or Roth IRA, provided the taxpayer is at least 70 1/2 years old. A qualified distribution made in January 2011 can be treated as made in 2010 for purposes of the $100,000 limitation and the required minimum distribution (RMD) for 2010.

The itemized deduction limitation is postponed until 2013.

The personal exemption phaseout won‘t apply until 2013.

The standard deduction marriage penalty relief is extended through 2012.

Omitted from the new law: repeal of a controversial expansion of Form 1099 reporting requirements.

SOME YEAR-END TIPS

If, for Israeli tax purposes, you qualify for the 10-year exemption on non-Israeli capital gains and/or the five- or 10-year exemption on dividends, you should consider this strategy: For US income-tax purposes, if you are married and file jointly, you can realize in 2010 up to $86,700 of long-term capital-gains and/or qualified dividends and pay no US tax (assuming no other income). Therefore, you would pay no tax in either country. If both spouses are over 65, you can realize up to $88,900.

If you are outside any Israeli exemption status, consider realizing net capital losses from the sale of securities. For US income-tax purposes, up to $3,000 of excess losses can be used to offset against all other taxable income; the balance is carried forward. For Israeli income taxes, 100% of the excess capital losses can be used to offset current-year dividend and interest income from other securities that are taxable in Israel at a rate not exceeding 25% (or from the same securities regardless of the tax rate). So consider taking a dividend from a corporation you control. The balance of the loss is carried forward against future capital gains. You will have to keep records for two different carry-forward capital losses.

If you live in Israel and anticipate inheriting assets from a US person, take urgent advice about avoiding a double tax trap: US estate tax and Israeli capital-gains tax if you later sell the asset.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

don@dscpa-israel.com
leon@hcat.co

Don Shrensky is a qualified CPA in both Israel and the US at Don Shrensky & Co.

Leon Harris is an Israeli CPA and international tax specialist

December 22, 2013
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