January 6th, 2011 Amanda Han CPA (Taxloopholes.com Tax Strategist)
We wanted to share some exciting news with you— www.Taxloopholes.com has just been totally updated! In fact, we’ve created over a dozen complimentary new tax and business tools for you.
Here are a few of the featured tools:
• 27-Point Deduction Checklist for Small Businesses
• The 10 Most Common Bookkeeping Mistakes You Need to
• 176-Page Ebook: Build a Business, Not a Job
• And a whole lot more!
Okay, enough of the announcements, it’s time to discuss the 2010 Tax Relief Act that was signed into law just last month. (For those of you who like the full details, the law was called, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. (Try saying that fast 3 times in a row!)
Today we’re going to focus on INDIVIDUAL taxpayers. Next week we’ll focus on business owners and then the following week on the implications for those of you who invest in real estate.
To keep things simple we’ll refer to this as the “2010 Tax Relief Act.” So the question is: Is this truly tax relief? Or is it a disguised tax increase? Well….the answer is Yes and No. The 2010 Tax Bill, is predicted to cost Americans $857 Billion dollars. It clearly does include some pretty significant tax cuts, although not all of them will result in tax savings for us.
CUTS ACROSS THE BOARD
First, let’s start with the good stuff that benefits individual taxpayers in general. Individual income tax rates will remain at their current levels across the board throughout 2011 and 2012 instead of increasing across the board as previously enacted. This is a big deal considering they were originally going to increase substantially.
For an individual earning $50,000, this means a federal income tax savings just under $900 per year. The reduced tax rate for all individuals is something of significance to note because there are a lot of related planning opportunities. One example is for those individuals who converted their retirement funds to a Roth account before December 31, 2010, Kudos to you! You can now enjoy the benefits of spreading any taxes that you may have to pay into the 2011 and 2012 year knowing confidently that tax rates are not going up! This means your ability to start your retirement account on its path to Tax FREE growth, delaying the related taxes, and not having to compromise to a bigger tax bill with increased rates.
ADDITIONAL $2,136 TAX SAVINGS
Another REALLY great tax relief is a 2% cut to Social Security taxes (i.e. payroll taxes). Although 2% may seem like a small number, this 2% reduction is expected to put up to an additional $2,136 back into each worker’s pocket in 2011. One of the most important things to note is that this tax cut benefits all taxpayers, regardless of income level.
For self-employed individuals, there is an additional perk because the deduction that you get to take on self-employment taxes paid is without regards to the 2% cut. What does this mean? In essence, you can write-off your self-employment taxes “as if” the rates did not decrease…so taking a deduction for an expense buying prescription drugs that you did not incur!
AMT RELIEF & OUTLOOK
The new legislation put together yet another “temporary” patch for middle income taxpayers under the Alternative Minimum Tax (AMT) patch.
The AMT patch will save 21 million taxpayers that would have otherwise paid higher taxes for 2010. As an example, we have a client who owns a handful of investments properties and a management company in the state of California. The AMT patch will save him somewhere close to $7,000 in taxes in the 2010 year. Of course, we all know that when we as taxpayers save money, this means we are at the same time adding to our country’s deficit. The AMT patch alone is estimated to cost us $136 Billion!
KIDS & DEPENDENT STRATEGIES
If you have kids under age 18, you can take advantage of a great tool to help your children pay for college with the Coverdell Education Savings Accounts (ESA). The 2010 tax Relief allows certain taxpayers to contribute up to $2,000 per child into the account. The money in that bucket can be invested into stocks, bonds, or self-directed into most types of alternative assets including gold and real estate.
What most people do not know is that the ESA is extremely flexible… you do not have to wait until college to utilize the funds for your kids. Money from the ESA can actually be utilized for expenses for your child’s elementary and secondary schools too! We have a client who self-directed his kids’ ESA money into Super Bowl tickets and profited over $15,000 in just a few months. All that profit is not only tax free but it can remain in the ESA and make additional investments for more tax free growth. When they decide to take that money out to be used for elementary or college expenses, they will pay zero taxes on that as well. Now that is the power of tax savings and wise investing.
For taxpayers with kids under age 17, you may continue to take advantage of the child tax credit of up to $1,000 for 2011 and 2012. If you pay for expenses for the care of your child or other dependent so that you can work, don’t forget to claim a Dependent Care Credit of up to $2,100 on your tax return for this year.
ESTATE & GIFTING OPPORTUNITIES
The highly anticipated estate tax change was finally determined as part of the 2010 Tax Relief Bill. Most taxpayers will be happy to know that the estate tax exemption was increased from $1 million per person all the way up to $5 million per person and the top tax rate will remain at the lower 35%.
This is a significant change especially for high net worth families because now the dollar amount that is exempt from estate taxes is $10 million for married couples.
For the first time, the estate, gift and generation-skipping taxes will be “unified” so that one $5 million exemption per individual applies to all three. This will make it much easier for wealthy taxpayers to make gifts during their life to children & grandchildren.
If you are a taxpayer who is in a high paying tax bracket, now is a really great time to plan for ways to shift some of your income to other family members who may be in lower tax brackets. There are countless ways that you can use Family Limited Partnerships to shift income to lower taxed family members without losing control of those assets. With the current depressed market values and the new $5 million exemption, now is the time to get your tax and estate planning in place!
As you can see, for the individual tax payers, the 2010 Tax relief resulted in a win-win for low, middle, and high income taxpayers. With all the new tax breaks, it is imperative that we as taxpayers do our part to ensure we are taking full advantage of these benefits. As part of your Goal Planning for 2011, make tax savings part of that plan!
Next week in our Taxloopholes.com Bulletin we’ll focus on Part 2 of our 3 Part Series: 2010 Tax Relief Act: New Strategies Business Owners Need to Know.
Again, make sure you check poke around and take advantage of all the tools that are now part of the newly updated www.Taxloopholes.com site!