Year End Letter

To download in PDF format, Click Here

January 15, 2011
Greetings:

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This legislation extended the “Bush Tax Cuts” of 2001 and 2003 through the end of 2012. The result of this legislation is that tax rates for 2011 and 2012 will remain the same as the rates for 2010. This includes the maximum 15% rate on long-term capital gains and qualified dividends. In addition, many tax deductions and credits which were due to expire have also been extended until the end of 2012. The 2010 Act also provides some relief from the alternative minimum tax (AMT) by increasing the exemption amounts for 2010, 2011 and 2012.

Because of Congress’ delay in addressing the expiration of the Bush Tax Cuts, the Internal Revenue Service has announced that their systems will be unable to process tax returns that contain itemized deductions, the higher education tuition and fees deduction, and/or the educator expense deduction until mid- to late February. Our software provider has indicated that they will not accept these returns until the IRS will accept them. We will accept your information and prepare your returns when you provide the information to us, then we will hold the returns until the IRS can accept them.

Beginning with this filing season, we are required to file all individual, trust and estate income tax returns electronically, with the exception of returns containing certain form(s) not supported for electronic filing, unless you choose to file a paper return. We will assume that you intend to file electronically unless you inform us otherwise. 

CHANGES EFFECTIVE IN 2010

• Taxpayers aged 70 ½ or older were required to take minimum distributions from their IRAs and certain other retirement plans. The required minimum distribution rules were suspended for 2009. Minimum distributions were required again in 2010.
• Taxpayers can roll some or all their IRA money to a Roth IRA regardless of their adjusted gross income. In prior years, taxpayers whose AGI exceeded $100,000 were prohibited from converting to a Roth. Anyone that rolls from a regular IRA to a Roth IRA must pay taxes on the amount of the conversion. Any 2010 rollover to a Roth IRA is included in income half in 2011 and half in 2012 unless the taxpayer elects to have it all taxed in 2010. Similar provisions apply to employer-sponsored retirement plans that allow Roth contributions.
• The estate tax was repealed, and the Unified Credit Equivalent for gift tax remained at $1,000,000. Above this amount, Federal gift taxes apply. The top gift tax rate was reduced to 35%. The new tax law provided executors of estates of decedents dying in 2010 with the option of using the 2010 law (no estate tax and basis of assets transferred determined under the modified carryover basis rules) or the 2011 law ($5 million exclusion and step-up in basis of all assets).
• The new tax law reinstated the qualified charitable distributions provision whereby an individual age 70½ or older can satisfy his or her required minimum distribution (up to $100,000) by direct transfer of funds from the IRA to a charity. Because this change was made in mid-December with no warning, the taxpayer has until January 31, 2011 to make this transfer and treat it as having been made in 2010.
• Taxpayers who qualify have the option of electing Section 179 deduction, 50% or 100% special depreciation allowance, or MACRS depreciation for qualified business property placed in service in 2010. The 100% special depreciation allowance applies to property placed in service after September 8, 2010.
• The additional standard deduction for state and local property taxes was not extended to 2010. Taxpayers that itemized deductions will continue to deduct their property taxes.

CHANGES EFFECTIVE IN 2011

• For 2011, the Social Security tax rate is 4.2% for employees and 10.4% for self-employed individuals. The employer continues to pay 6.2% for its share of the Social Security taxes. This change is in lieu of the Making Work Pay credit which expired at the end of 2010.
• Maximum earnings subject to Social Security tax remains unchanged at $106,800.
• Maximum earnings to receive full Social Security benefits remains at $14,160 for individuals under “Full Retirement Age.” Individuals can earn up to $37,680 in the year that they attain FRA without a reduction.
• The estate tax returns with a $5 million exclusion and a maximum tax rate of 35%, and the Unified Credit Equivalent for gift tax increases to $5 million. Above this amount, Federal gift taxes apply. The top gift tax rate remains at 35%.
• The annual gift tax exclusion remains at $13,000. Payments of medical expenses or tuition made directly to the medical provider or to the school are not considered gifts for gift tax purposes. Also note that only the giver of the gift has reporting and tax responsibilities.
• The business mileage allowance increases from 50 cents to 51 cents per mile, effective January 1, 2011. The charitable mileage allowance remains at 14 cents. The medical and moving mileage allowances increase from 16.5 cents to 19 cents.
• The limit on annual contributions to defined contribution plans remains the lesser of $49,000 or 100% of compensation. The compensation limit remains at $245,000. The employer deduction is limited to 25% of aggregate compensation for all participants (20% of net self-employment income after self-employment tax deduction for self-employed).
• Contribution limits for IRAs and other retirement plans are as follows:

As of the date of this letter, our staffing consists of Diane Juergensen, CPA of Yardley, John Garrett of Langhorne and Maureen Austin of Langhorne.

If we prepared your tax return last year and you think it would be helpful, we can provide you with an organizer printout that lists your tax data from 2009 together with blank spaces to fill in your 2010 information. Just give us a call and ask for your organizer. When you have gathered your papers and information, call us at (215) 579-1260 for an appointment. Person-to-person interviews result in a better understanding of the information used in preparing your return, and they also result in better opportunities to identify tax savings for you. If you are experiencing financial difficulties, let us know. We look forward to seeing you again.

Robert H. McLaren, Theresa B. McLaren

McLaren & Co., P.C.