Several tax provisions expired at the end of 2009, and several more expired at the end of 2010. Congress enacted legislation (referenced below as the “Tax Relief and Jobs Creation Act” or “the Act”) late in 2010 extending many of these provisions, meaning that they will be available when preparing your 2010 tax return and when computing estimated taxes and payroll tax withholding in 2011. Here is a summary of the extended provisions of most relevance to clergy and church staff:
- Income tax brackets. The lower income tax rates enacted by Congress in 2001 and 2003 were to expire at the end of 2010. The Act extends these lower rates for all taxpayers through the end of 2012.
- Capital gains and dividends. Under prior law, the capital gains and dividend rates for taxpayers below the 25-percent income tax bracket was equal to zero percent. For those in the 25-percent tax bracket and above the capital gains and dividend rates were 15 percent. These rates were to expire at the end of 2010, and higher rates (10 percent and 20 percent) were to apply. The Act extends the lower capital gains and dividends rates for all taxpayers through the end of 2012.
- Child tax credit. Generally, taxpayers with income below certain threshold amounts may claim the child tax credit to reduce federal income tax for each qualifying child younger than age 17. In 2001, Congress increased the credit from $500 to $1,000 and made it refundable up to 15 percent of earnings above $10,000. In 2009, Congress amended the law to allow earnings above $3,000 to count toward refundability for 2009 and 2010. The Act extends these changes (which were scheduled to expire at the end of 2010) through the end of 2012.
- Marriage penalty relief. For many years, married couples filing a joint tax return paid more taxes than if they were unmarried filing individual returns. In 2001 Congress ended this so-called “marriage penalty” by (1) increasing the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return; and (2) increasing the 15-percent income tax rate bracket for a married couple filing a joint return to twice the size of the corresponding rate bracket for an unmarried individual filing a single return. Both of these provisions were extended through the end of 2012.
- Dependent care credit. The dependent care credit allows taxpayers a credit for a percentage of child care expenses for children younger than 13 and disabled dependents. In 2001, Congress increased the amount of eligible expenses from $2,400 for one child and $4,800 for two or more children to $3,000 and $6,000, respectively, and increased the applicable percentage from 30 percent to 35 percent. The Act extends these changes through the end of 2012.
- Earned income tax credit. Under prior law, working families with two or more children qualified for an earned income tax credit equal to 40 percent of the family’s first $12,570 of earned income. In 2009, Congress increased the earned income tax credit to 45 percent of the family’s first $12,570 of earned income for families with three or more children and increased the beginning point of the phaseout range for all married couples filing a joint return (regardless of the number of children). The Act extends the increased credit for families with three or more children and the higher phase-out ranges for all married couples filing a joint return through the end of 2012.
- Coverdell Education Savings Accounts. Coverdell Education Savings Accounts are tax-exempt savings accounts used to pay the higher education expenses of a designated beneficiary. In 2001, Congress increased the annual contribution amount from $500 to $2,000 and expanded the definition of education expenses to include elementary and secondary school expenses. These changes were extended by the Act through the end of 2012.
- Employer-provided educational assistance. An employee may exclude from taxable income up to $5,250 per year of employer-provided education assistance. Prior to 2001, this incentive was temporary and only applied to undergraduate courses. Congress enacted legislation in 2001 that expanded this provision to graduate education and extended it to the end of 2010. The Act extends the changes to this provision through the end of 2012.
- American Opportunity Tax Credit. The American Opportunity Tax Credit is available for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this tax credit, taxpayers receive a tax credit based on 100 percent of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25 percent of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent of the credit is refundable (i.e., payable to individuals with no income tax liability). This tax credit is subject to a phaseout for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). The Act extends this credit through the end of 2012.
- Alternative minimum tax. The Act allows an individual to offset the entire regular tax liability and alternative minimum tax liability by nonrefundable personal credits for 2010 and 2011. The provision provides that the individual AMT exemption amount for taxable years beginning in 2010 is (1) $72,450, for married individuals filing a joint return and surviving spouses; (2) $47,450 for other unmarried individuals; and (3) $36,225 for married individuals filing separate returns. The provision provides that the individual AMT exemption amount for taxable years beginning in 2011 is (1) $74,450, in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of other unmarried individuals; and (3) $37,225 in the case of married individuals filing separate returns. Without these changes, the AMT exemption amounts would have plummeted in 2010 and beyond, exposing tens of millions of Americans to the AMT.
- Energy-efficient existing homes. The Act extends the credit for energy-efficient improvements to existing homes through the end of 2011. Standards for eligible improvements are updated to reflect advances in energy efficiency.
- Above-the-line deduction for certain expenses of elementary and secondary school teachers. The Act extends the $250 above the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom through the end of 2011.
- Deduction of state and local general sales taxes. Congress enacted legislation in 2004 that provided an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes. Taxpayers could deduct the total amount of general state and local sales taxes they paid by accumulating receipts showing general sales taxes paid, or they could use tables created by the IRS. This provision was adopted to address the unequal treatment of taxpayers in the nine states that have no income tax. Taxpayers in these states cannot take advantage of the itemized deduction for state income taxes. Allowing them to deduct sales taxes helps offset this disadvantage. The Act extends this deduction through the end of 2011.
- Above-the-line deduction for qualified tuition and related expenses. Under prior law an above-the-line deduction of up to $4,000 was available for qualified education expenses incurred by a taxpayer or a taxpayer’s spouse or dependent. Qualified education expenses included tuition and certain related expenses required for enrollment or attendance at an eligible educational institution (any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education). Student activity fees and expenses for course-related books, supplies, and equipment were included in qualified education expenses only if the fees and expenses had to be paid to the institution as a condition of enrollment or attendance. This deduction was extended by the Act through the end of 2011.
- Extension of tax-free distributions from individual retirement plans (“IRAs”) for charitable purposes. The Act extends a provision that permits tax-free distributions to charity from an IRA of up to $100,000 per taxpayer, per taxable year, through the end of 2011. Distributions are eligible for the exclusion only if made on or after the date the IRA owner attains age 70½ and only to the extent the distribution would be includible in gross income (without regard to this provision). The Act allows individuals to make charitable transfers during January of 2011 and treat them as if made during 2010.
- Parity for mass transit benefits. The Act extends the increase in the monthly exclusion for employer-provided transit and vanpool benefits to that of the exclusion for employer-provided parking benefits through the end of 2011.
- Refund and tax credit disregard for means-tested programs. Prior law ensured that the refundable components of the earned income tax credit and child tax credit did not make households ineligible for means-tested benefit programs, and did not count as income in determining eligibility (and benefit levels) in such programs. Without these provisions, the receipt of a tax credit could put a substantial number of families over the income limits for these programs in the month that the tax refund was received. The Act disregards all refundable tax credits and refunds as income for means-tested programs. The proposal is effective for amounts received after December 31, 2009, and does not apply to amounts received after December 31, 2012.
- Extension of enhanced charitable deduction for contributions of food inventory. The Act extends a provision allowing businesses to claim an enhanced deduction for the contribution of food inventory through the end of 2011.
- Personal Exemption Phaseout. Personal exemptions allow a certain amount per person to be exempt from tax (currently $3,650). Due to the Personal Exemption Phase-out (“PEP”), the exemptions are phased out for taxpayers with income above a certain level. The PEP was repealed in 2010. This repeal was extended by the Act through the end of 2012.
- Itemized deduction limitation. Generally, taxpayers itemize deductions if their total deductions are more than the standard deduction amount. Since 1991, the amount of itemized deductions is reduced for taxpayers with income above a certain amount. This limitation is generally known as the “Pease limitation.” It was repealed for 2010.
The Act extends the repeal of the Pease limitation through the end of 2012. The Act contained two other significant provisions that were not extensions of expiring provisions:
• Payroll tax “holiday.” Under current law, employees pay a 6.2 percent Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4 percent Social Security self-employment tax on all of their self-employment income up to the same threshold. The Act provides a payroll tax and self-employment tax “holiday” during 2011 of two percentage points. This means employees will pay only 4.2 percent on wages and self-employment individuals will pay only 10.4 percent on self-employment income up to the threshold. This provision will result in an increase in take-home pay for millions of workers. The IRS has issued new withholding tables (see Publication 15) that reflect this change, and churches should begin using the new tables as soon as possible. For any Social Security tax that is overwithheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2011. Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.
The Act revives the estate tax, but establishes an exemption of $5 million per person and $10 million per couple and a top tax rate of 35 percent for two years, through 2012.
• Estate tax relief. Beginning in 2001, Congress began phasing out the estate tax. It was fully repealed in 2010. The Act revives the estate tax, but establishes an exemption of $5 million per person and $10 million per couple and a top tax rate of 35 percent for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010, and before January 1, 2011. Under prior law, couples had to do complicated estate planning to claim their entire exemption. The Act allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. This provision is effective for estates of decedents dying after December 31, 2010.
Some expired tax provisions were not extended by The Act. These include:
- Additional standard deduction for state and local real property taxes. Congress enacted legislation in 2008 that provided a limited tax deduction for state and local property taxes to non-itemizers by increasing their standard deduction by the lesser of (1) the amount allowable to the taxpayer as a deduction for state and local taxes or (2) $500 ($1,000 in the case of a married individual filing jointly). The increased standard deduction was determined by taking into account real estate taxes for which a deduction was allowable to the taxpayer.
- Making work pay credit. In the past, eligible individuals could claim a refundable income tax credit for two years (2009 and 2010). The credit was the lesser of (1) 6.2 percent of an individual’s earned income, or (2) $400 ($800 in the case of a joint return). Taxpayers could elect to receive this benefit through a reduction in the amount of income tax withheld from their paychecks, or through claiming the credit on their tax returns. The credit expired at the end of 2010 and was not renewed. The withholding tables for 2011 are no longer adjusted for this credit.
- Deduction of state and local tax on the purchase of qualified motor vehicles. In the past, taxpayers could claim an above-the-line deduction for qualified motor vehicle taxes. Qualified motor vehicle taxes included any state or local sales or excise tax imposed on the purchase of a qualified motor vehicle. A qualified motor vehicle was a passenger automobile, light truck, or motorcycle (with a gross vehicle weight of not more than 8,500 pounds) that was acquired for use by the taxpayer after February 17, 2009, and before January 1, 2010, the original use of which begins with the taxpayer. The deduction was limited to the tax on up to $49,500 of the purchase price of a qualified motor vehicle. Congress has not extended this deduction.
- Waiver of minimum required distribution rules for IRAs and defined contribution plans. In general, persons participating in IRAs and defined benefit plans must begin receiving “required minimum distributions” by a certain age in order to avoid penalties. Congress suspended this rule for 2009, but has not done so for any subsequent year.
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