Dr. Paul S. Fraser

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Earned Income Exclusion

Tax Changes for 2009

Tax Changes for 2010

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Tipo de Cambio 2000-2010

Real Estate in Mexico

Forming Corporations

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New Offices for 2007

Tax Changes for 2010-2011

Congress Passes 2010 Tax Relief Act - Individual Income Tax Changes(12/17/2010)

On December 17, the President signed into law the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 (“2010 Tax Relief Act”). The 2010 Tax Relief Act was
passed by Congress on December 16.

The 2010 Tax Relief Act extends the Bush-era tax cuts for two years, includes estate tax relief, a twoyear
“patch” of the alternative minimum tax (AMT), a 2 percentage point cut in employee-paid payroll
taxes and self-employment tax for 2011, new incentives to invest in machinery and equipment, and many
retroactively revived and extended tax breaks for individuals and businesses. The following is an
analysis of some of the individual income tax changes:

Individual Tax Rates and Brackets

The 2010 Tax Relief Act retains the Bush-era tax cuts for two years. Thus, the income tax rates for
individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36%
and 39.6%). Additionally, the size of the 15% tax bracket for joint filers and qualified surviving spouses
will remain at 200% (instead of dropping to 167%) of the 15% tax bracket for individual filers.
Tax on Capital Gains and Qualified Dividends Extended for Two Years
Under the 2010 Tax Relief Act, long-term capital gains (with the exception of 28% rate gain and
unrecaptured section 1250 gain) will continue to be taxed at a maximum rate of 15% through Dec. 31,
2012. Also extended is the rule that a 0% rate applies to the extent that the gain would have been taxed
at a 10% or 15% rate if it had been ordinary income. Additionally, qualified dividends paid to individuals
through 2012 will be taxed at the same rates as long-term capital gains.

Alternative Minimum Tax (AMT) “Patched” for Two Years

The 2010 Tax Relief Act provides that the AMT exemption amounts for 2010 will for married individuals
filing jointly and surviving spouses will be $72,450 ($74,450 for 2011), for unmarried individuals will be
$47,450 ($48,450 for 2011) and for married individuals filing separately will be $36,225 ($37,225).
Also for 2010 and 2011, many nonrefundable personal credits will be allowed against the AMT (without
the “patch,” they couldn't offset AMT).

2 2010 Tax Relief Act – Individual Income Tax Changes

Temporary Employee/Self-Employed Payroll Tax Cut for 2011
Under current law, employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in
2011) and self-employed individuals pay 12.4% Social Security self-employment taxes on all their selfemployment
income up to the same threshold. For 2011, the 2010 Tax Relief Act gives a twopercentage-
point payroll/self-employment tax holiday for employees and self-employeds. As a result,
employees will pay only 4.2% Social Security tax on wages and self-employed individuals will pay only
10.4% Social Security self-employment taxes on self-employment income up to the threshold. The
maximum savings for 2011 will be $2,136 (2% of $106,800).

List of Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011
Under the 2010 Tax Relief Act, the following tax breaks for individuals that would have expired will be
retroactively reinstated or extended:

1. The $250 above-the-line deduction for certain expenses of elementary and secondary
school teachers is extended through 2011;

2. The election to take an itemized deduction for State and local general sales taxes in lieu of
the itemized deduction permitted for State and local income taxes is extended through
2011;

3. The $1,000 child tax credit and its expanded refundability is extended through 2012;

4. The higher education tax credit (the American Opportunity tax credit) and its partial
refundability is extended through 2012;

5. Expanded dependent care credit is extended through 2012;

6. Expanded adoption credit (but not refundability) is extended through 2012;

7. Increased contribution limits and carryforward period for contributions of appreciated real
property (including partial interests in real property) for conservation purposes is extended
through 2011;

8. The above-the-line deduction for qualified tuition and related expenses is extended through
2011;the provision that permits taxpayers age 70 1/2 or older to make tax-free
distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per
taxpayer, per tax year (additionally, individuals will be allowed to treat IRA transfers to
charities during January of 2011 and as if made during 2010) is extended through 2011;

9. The student loan deduction rules are extended through 2012;

10.Treatment of mortgage insurance premiums as deductible qualified residence interest; and

11.Exclusion of 100% of gain on certain small business stock.

Tax Changes For 2010

President Obama has put forward several tax proposals in his 2010 budget for Congress to consider. These proposals are explained in the Greenbook (PDF, 135 pages) released by the Treasury Department's Office of Tax Policy on May 11, 2009. These proposals have not yet made it into law. If all of the Administration's proposals are enacted, they would generate an additional $61.7 billion in tax revenue for the federal government.

What follows is a summary of proposed tax changes for individuals and small business owners. A more extensive summary is found in the Tax Briefing (PDF, 10 pages) from CCH.

Making Work Pay Tax Credit

Currently Americans workers are eligible for a refundable $400 tax credit for 2009 and 2010. The full credit is available for unmarried filers with income of $75,000 or less, and for married filers with income of $150,000 or less. Obama proposes to make this tax credit permanent.

Earned Income Tax Credit

The EIC was changed for 2009 and 2010 to provide a higher tax credit for families with three or more children, and the credit is made available over a wider range of income levels. In 2008 and earlier, the earned income credit maxed out at two children and had narrower income ranges for married filers compared to unmarried filers. President Obama proposes to make these changes permanent.

Child Tax Credit

For 2009 and 2010, the child tax credit may be partially refundable (meaning that taxpayers could, potentially, receive a tax refund higher than the amount they paid in) based on a threshold amount of 15% of earned income in excess of $3,000. This $3,000 threshold will revert back to a threshold of $12,700 (indexed for inflation) in 2011. Obama proposes to make the $3,000 threshold permanent, and the amount would not be indexed for inflation. The Greenbook comments that if the law is allowed to revert to the higher threshold amount, as many as "11 million low-income families would have a tax increase as a result."

Retirement Savings Credit

Currently, some taxpayers are eligible for a tax credit of up to $1,000 for saving money in a retirement plan such as a 401(k) or IRA. The tax credit is non-refundable (meaning once the person's tax liability is reduced to zero, any additional credits won't increase a person's refunds). Obama proposes to replace the $1,000 non-refundable credit with a refundable credit equal to 50% of retirement savings up to a maximum of $500. (The credit amounts would be indexed for inflation.) Additionally, the income range that qualifies for the credit would be expanded. Taxpayers could ask the IRS to deposit the portion of their refund that represents the Savings Credit directly into their retirement plan.

Individual Retirement Accounts

Currently, taxpayers must set up and fund an Individual Retirement Account (IRA) themselves. The Obama administration proposes that employers automatically enroll employees in an IRA and deduct 3% of an employee's pay to be deposited directly into the IRA, unless the employee decides to opt out of the IRA program or decides on a different funding amount. The administration would also provide guidance to employers for choosing default investment options for how the IRA funds are invested, and would provide employers with a tax credit of up tp $250 for complying with the automatic IRA provisions. Employers that provide 401(k) or other group retirement plans would not have to provide automatic IRA enrollment.

American Opportunity Tax Credit

Obama proposes to make the American Opportunity Tax Credit a permanent replacement for the Hope Credit. Currently, the American Opportunity credit is available for 2009 and 2010, and provides for a credit of up to $2,500, of which $1,000 could be refundable. The credit is available for tuition, books and course materials for the first four years of college education.

Sales Tax Deduction

Currently, taxpayers can chose to deduct either state and local income taxes or state and local sales taxes as an itemized deduction. The sales tax deduction is scheduled to expire in 2009. The Obama administration proposes to extend the optional sales tax deduction to 2010.

President Obama has proposed many changes to the tax laws. What follows is a summary of tax hikes, expanded information reporting requirements, and higher penalties.

Tax Rates

Currently there are six tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. Those tax brackets were implemented in 2001 and are scheduled to expire at the end of 2010. Obama proposes to continue using the 10% through 28% tax rates and to replace the top two rates with 36% and 39.6% rates. How income is measured in determining the tax bracket would change. The 36% bracket would begin at $200,000 minus the standard deduction and one personal exemption for single filers, and at $250,000 minus the standard deduction and two personal exemptions for married filers. How tax rates are determined remains unchanged for the other tax brackets. The beginning of the 39.6% bracket was not explained in the Greenbook; for 2009, the highest tax rate begins at $372,950 for married filers. The new tax rates would begin in 2011.

Itemized Deductions

Itemized deductions are reduced for filers with adjusted gross income of $166,800 (for 2009) or higher. The amount of the reduction have been gradually minimized from 2006 to 2009, and in 2010 there will be no reduction in the amount of itemized deductions for higher-income filers. In 2011, the reduction amount is scheduled to revert back to a level 3% of AGI in excess of the AGI exceeding the certain threshold amount. The Obama administration proposes to allow the law to revert back. Some deductions are not subject to reduction: medical expenses, investment interest, casualty and theft losses, and gambling losses. The threshold amount would be $200,000 for single filers and $250,000 for married filers, and those thresholds would be indexed for inflation.

The tax value of itemized deductions would be further limited for higher-income filers. "The proposal would limit the value of all itemized deductions by limiting the tax value of those deductions to 28 percent whenever they would otherwise reduce taxable income in the 36 or 39.6 percent tax brackets," according to the Greenbook. This limitation to the 28% bracket would apply even after deductions have been reduced.

Personal Exemptions

Personal exemptions are reduced for higher-income filers. This reduction is eliminated in 2010. President Obama would reinstate the reduction beginning in 2011 for single filers with income over $200,000 and married filers with income over $250,000.

Capital Gains and Dividends

Currently qualified dividends and long-term capital gains are taxed at rate of 15% or zero percent for the taxpayers in the two lowest tax brackets. These rates are scheduled to expire at the end of 2010, at which time capital gains would be taxed at 20% and dividends would be taxed at ordinary income taxes rates. Obama proposes that capital gains and qualified dividends be taxed at 20% for taxpayers in the top two tax brackets of 36% and 39.6%, at 15% in the middle two tax brackets, and at zero percent in the lowest two tax brackets. The new rates would take effect in 2011.

Information Reporting

Reporting on non-employee compensation is required only for payments of $600 or more paid to individuals and to other non-corporate recipients. The Obama administration proposes that information reporting be expanded to include corporate recipients. Additionally, Obama proposes to increase reporting requirements for certain types of life insurance policies, requires contractors to provide businesses with their correct name and taxpayer identification number, and would allow business to withhold tax on non-employee payments at a rate of 15%, 25%, 30%, or 35%, with the rate of tax selected by the contractor. Obama would also double the fines for failing to submit the required documents to the IRS.

Foreign Bank Account Reporting

Currently, American citizens and residents report to the US Treasury whether they own bank accounts in foreign countries. Obama proposes to expand the amount of information reported about foreign accounts. Americans would be required to report transfers to or receipts from accounts held abroad if they totaled $10,00 or more during the year. Furthermore, Obama proposes that banks and other financial institutions submit reports to the IRS about transfers made by Americans to foreign bank accounts or about foreign accounts opened. Americans would also be required to report information about their foreign accounts on their income tax return in addition to filing the annual foreign bank account report with the Treasury Department.

Penalties

Repeated late filing of tax returns would become a felony, punishable by up to five years in jail or a fine up to $250,000. A felony offense would be failing to file a tax return in any three years within any consecutive five-year period in which the total tax liability is at least $50,000. Currently, failing to file a tax return is a misdemeanor offense, punishable by up to one year in jail and a fine of not more than $25,000.

The penalty for writing a bad check (which currently covers only checks and money orders) would be expanded to include any "commercially acceptable payment," including electronic payments.

Statute of Limitations

Currently the IRS cannot assess additional tax or initiate an audit after three years from the date a tax return is filed. This three year period also applies to receiving refunds from the IRS. Obama proposes to allow the statute of limitations to be extended by up to two years for federal changes in a tax return related to an audit by a state or local tax agency.

Offer in Compromise

Taxpayers would no longer have to submit non-refundable lump-sum or periodic payments when requesting an offer-in-compromise from the IRS to settle an outstanding tax debt. Starting in 2006, the tax laws required a taxpayer to begin making payments on a proposed settlement at the time that an offer is requested.
 
 
 

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