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Individual Income Tax 2010 Update

Individual Income Tax 2010 Update. Julie Emanuele Kevin Klein Ryan Thompson. Today’s Presentation. 2010 Federal Update Looking Forward: 2011 Federal Changes 2010 Virginia Update Looking Forward: 2011 Virginia Changes. Elective Salary Deferrals. 401(k) maximum elective deferral for 2010:

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Individual Income Tax 2010 Update

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  1. Individual Income Tax 2010 Update Julie Emanuele Kevin Klein Ryan Thompson

  2. Today’s Presentation • 2010 Federal Update • Looking Forward: 2011 Federal Changes • 2010 Virginia Update • Looking Forward: 2011 Virginia Changes

  3. Elective Salary Deferrals • 401(k) maximum elective deferral for 2010: • Under age 50: $16,500 • “Catch up” contribution of $5,500 allowed if age 50 or older

  4. IRA Contributions • Maximum to a Traditional or Roth is $5,000 • Catch up contribution of $1,000 for taxpayers at least age 50 by the end of 2010 • Have until due date of return (not including extension) • Phase-out ranges different – see next slide

  5. Health Savings Accounts • Pay out-of-pocket medical expenses with pre-tax income • Fund an HSA account with direct transfer from IRA • Maximum Contribution of $3,050 for single coverage ($6,150 for family coverage) • If 55 or older, additional $1,000 catch-up contribution is available

  6. Higher Education Expenses • Credit extended through 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation act of 2010 • Deduction of up to $4,000 instead of Hope or Lifetime Learning tax credits – extended through 2011 • Subject to phase out

  7. Education Credits • American Opportunity Tax Credit • Formerly known as Hope Scholarship credit • Maximum $2,500 credit per student • First 4 years of undergraduate education • Half time student • Phaseout begins at $80K for single filers ($160K for joint) and ends at $90K ($180K for joint) • Lifetime Learning Credit • Maximum $2,000 credit per return • Available for unlimited number of years • Less than half time enrollment-non degree seeking students • Phaseout begins at $51K for single filers ($102K for joint) and ends at $61K ($122K for joint) *Credit is taken on Form 8863

  8. Qualified Educator Expenses • Available for any Teacher, Instructor, Counselor, Principal, or Aides teaching K-12 grades • Must work at least 900 hours during taxable year • Can deduct “above-the-line” up to $250 of expenses incurred for books and (non-athletic) supplies • Excess expenses of $250 can be deducted on Schedule A subject to 2% of AGI • Expires at end of 2011

  9. Sales & Use Tax Deduction • Available through 2011 • Deduct either state income tax or sales and use tax • Use Receipts Method or Sales Tax Table

  10. Charitable Contribution Substantiation • Some form of substantiation for charitable contributions must be retained Examples: Receipt, Letter from Charity, etc. • Deductions only available if taxpayer itemizes deductions • Distributions directly from IRA, expires in 2011 (discussed in more detail later)

  11. Residential Energy Credits • Nonbusiness Energy Property Credit • Credit equal to 10% of the cost of qualified energy efficiency improvements to principal residence • Credit is limited to $500 • For property placed in service in 2011 • Previous credits taken are deducted from the overall credit limit

  12. Kiddie Tax • Now effects children ages 19-23 who are full time students • Earned income is less than half of support • Investment income greater than $1,900

  13. 2010 Capital Gains • Capital gains that would have been taxed at 5% will not be taxed at all • Capital gains that would have been taxed at 15% will remain at 15% • Will expire in 2013 when the 0% rates will go to 10% and 15% rates will go to 20%

  14. Excluded Combat Pay • Can elect to have excluded combat pay count as earned income in the calculation for the earned income tax credit • Counts towards “compensation” for IRA contribution limitations & Making Work Pay Credit (discussed later)

  15. Roth IRA Conversions • Limit on modified adjusted gross income of $100,000 lifted for all taxpayers beginning in 2010 • Convert all or any portion of a Traditional, SEP, or SIMPLE IRA into a Roth IRA during 2010 • Retain option to recharacterize conversion until due date of return (including extensions)

  16. Roth IRA Conversions • Elect to defer taxes on conversion until 2011 & 2012 (only available for conversions in 2010) • Possible Benefits from Converting • Enjoy Tax-Free Distributions in Retirement • Benefit from Tax-Free Earnings Growth • Manage Personal Income Tax Implications • Take Advantage of Perfect 20/20 Hindsight with Roth IRA Recharacterizations

  17. Making Work Pay Credit • Enacted by the 2009 Recovery Act • Available for eligible taxpayers in 2010 • Refundable credit equal to lesser of: • 6.2% of taxpayer’s earned income • $400 per individual ($800 married couples) • Begins phase out at $75,000 ($150,000 for MFJ) in modified adjusted gross income

  18. Partial Payroll Tax Holiday • Temporary reduction of Social Security payroll tax for wage earners and self-employed individuals • During 2011, 2% reduction in FICA taxes • Applies to all individuals subject to Social Security tax without regard to any limit on the wages or other income they receive • Employees will receive the benefit through reduced withholding

  19. First-Time Homebuyer Credit • Extended until April 30th, 2010 (or until October 1st, 2010 if binding contract agreed to before May 1st, 2010) • First-Time Homebuyers - Tax credit up to lesser of $8,000 or 10% of purchase price • Long-Time Residents – Tax credit up to lesser of $6,500 or 10% of purchase price

  20. First-Time Homebuyer Credit • Credit phased out when MAGI falls between the following income levels (completely phased out at highest level) • Single - $75,000 - $95,000 • Married filing Joint - $150,000 - $170,000 • No credit for purchases exceeding $800,000 – no phase out available here • Refundable, but also can be Recaptured

  21. Standard Deduction • 2010 Applicable Standard Deduction: • Single - $5,700 • HOH - $8,400 • Joint (or surviving spouse) - $11,400 • Real Estate Taxes up to $500 (single) or $1,000 (joint) can no longerbe added onto the effective standard deduction

  22. Unemployment Compensation • Federal Law – Can no longer exclude up to $2,400 of unemployment compensation benefits received during from taxable income – all benefits are now taxable • Virginia Law – Can exclude all unemploy-ment compensation benefits received during 2010 year from taxable income

  23. COBRA Subsidy • Provides a 65% subsidy for COBRA continuation premiums for up to 15 months • Applies to workers who were involuntarily terminated between Sept. 1, 2008 and May 31, 2010 • Taxable income for year cannot exceed $125,000 (single) or $250,000 (joint) • Subsidy is non-taxable

  24. Job Hunting Expenses • Expenses incurred searching for new employment in same trade or business are deductible as miscellaneous itemized deductions subject to 2% limitation • Examples: • Employment Agency Fees • Resume Preparation Services • Travel & Transportation Fees (Unreimbursed) • Employment Counseling

  25. Estate, Gift, & GST Taxes • Temporarily reinstates and modifies the estate and GST taxes retroactive to the beginning of 2010, modifies gift tax beginning in 2011 • Estates of decedents dying in 2010 can elect out and use former law – zero rate and modified carryover basis • Rules apply through 2012

  26. Estate, Gift, & GST Taxes • New estate tax regime • Exemption of $5 million per spouse • Flat rate 35% • Exemption will be indexed for inflation beginning in 2012 • Portability • A decedent’s unused estate exemption will transfer to the surviving spouse • Executor of deceased spouse’s estate must compute the unused amount and make an election to grant it to surviving spouse

  27. Estate, Gift, & GST Taxes • Gift Tax – for next 2 years, 35% flat rate and exemption will be reunified at $5 million after 12/31/10 • Act clarifies that the credit permitted with respect to prior taxable gifts to determine current year liability is determined by rate structure in effect on date at which the credit is being determined, not rate structure in effect when gift was made

  28. Estate, Gift, & GST Taxes • GST reinstated for decedents dying and transfers made after 12/31/09 • Exemption for 2011 and 2012 is $5 million • GST tax rate for transfers made after 2010 is equal to highest estate and gift rate is effect for such year • In 2010, GST tax applies, but rate is 0%, exemption is $5 million • Due date for returns with transfers 1/1/10 through 12/17/10 is 9 months from date of enactment

  29. Individual Income Tax Relief • 6 rate brackets from 10-35% will remain in place • 15 % top rate on qualified dividends and long-term capital gains, 0% for those in lowest 2 rate brackets • In 2013, income tax rates return to pre-EGTRRA levels – highest rate 39.6% • Capital gain rates return to 10 and 20% • Dividends taxed as ordinary income

  30. Individual Income Tax Relief • 2 year extension of repeal of personal exemption phaseout and itemized deduction limitation • Marriage penalty relief extended through 2012 – increase in standard deduction and increase in size of rate brackets • $1,000 Child credit extended through 2012 – with increased refundability • AMT “patch” extended for 2010 and 2011 – exemption of $72,450 and $74,450 MFJ

  31. Individual Income Tax Relief • Increase in adoption credit and income exclusion for employer provided assistance to $10,000 • Employer-provided child care tax credit equal to 25% of qualified expenses for employee child care and 10% of qualified expenses for child care resource and referral services • Increase in percentage rate, maximum limit, and phase-down of dependent care credit

  32. Individual Income Tax Relief • Extends EITC increases and modifications under EGTRRA and ARRA • $5,250 annual employee exclusion for employer provided educational assistance, includes graduate courses • Expansion of student loan interest deduction beyond 60 months and increased income phase-out range • Tax-free distribution for IRA for charitable purposes for individuals 70 ½ and older

  33. Additional 2010 Return Info • Filing deadline is April 18, 2011 • For 2010, self-employed people can use SE health insurance to reduce their social security liability as well as income tax • Small business must use EFTPS for federal tax deposits

  34. Looking forward: 2011 • Elective deferrals contribution limits will remain the same as 2010 • IRA contributions will remain the same as 2010 • Expiring adjustments, credits, and deductions

  35. Virginia Update • Virginia Sales Tax Holidays • Certain Virginia Deductions and Tax Credits • Looking Forward: 2011 & Beyond

  36. Virginia Sales Tax Holidays • May 25-31, 2011 – Hurricane Preparedness Equipment • August 5-7, 2011 – School Supplies, Clothing & Footwear • October 7-10, 2011 – Energy Star Qualified Products

  37. Virginia Livable Home Credit • Credit for supplies purchased and other items needed to retrofit existing residences with accessibility and/or visitability features • Also applies to supplies needed to incorporate features into new construction • For tax year 2010, maximum amount is $2,000, double the 2009 maximum

  38. Community of Opportunity Tax Credit • Landlords may qualify for an individual or corporate tax credit equal to 10% of the fair market value of rent • Replaces the Low Income Housing Tax Credit

  39. Green Jobs Creation Tax Credit • VA individuals, corporations, and pass-through entities eligible to claim $500 credit for each new “green” job created • "Green” job means employment in industries relating to the field of renewable, alternative energies • Each job must pay $50,000 or more • Maximum of 350 qualified jobs per employer • Effective January 1, 2010 to January 1, 2015

  40. Federal and State Salary Subtraction • Only individuals earning less than $15,000 in wages are entitled to subtraction • Effective For: Employees of state-supported universities, colleges, and community colleges and other state and federal agencies • Not Effective For: Employees of Local Government, U.S. Postal Service, Army, Navy, Air Force, Marines, and National Guard

  41. College Savings Plans • Allowable deduction for contributions to college savings account is $4,000 per plan or account • There are currently no restrictions on deduction amounts for individuals who are 70 or older

  42. Household Employers • Household employers may now elect to file and pay household Virginia employment taxes annually

  43. Looking Forward • Increase in the filing threshold in Virginia

  44. Virginia Tax Department Services • e-Subscriptions • Customized e-mails on a variety of state tax topics • Live Chat • Available weekdays from 8 a.m. to 8 p.m.

  45. Summary • 2010 Federal Updates • Looking Forward: 2011 Federal Changes • 2011 Virginia Updates • Looking Forward: 2011 Virginia Changes

  46. Questions • Julie Emanuele • Phone: 804-433-1084 • Email: jemanuele@theroselinegroup.com • Ryan Thompson • Phone: 804-545-7458 • Email: rthompson@theroselinegroup.com • Kevin Klein • Phone: 804-545-7459 • Email: kklein@theroselinegroup.com www.theroselinegroup.com

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