Financial Loopholes to Take Advantage of Now

With 2010 winding down, there are a few tax advantages that will expire on Jan. 1 if you don't take advantage of them now.

Author:: Robert Flach
Publish date:: Nov 8, 2010 6:00 AM EST

In 2001 Congress passed a massive tax reform bill called the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which provided tax cuts to all Americans, in all income levels, via a multitude of changes to the tax code. These tax benefits have come to be known as the Bush tax cuts. These tax benefits were not made permanent, but instead were scheduled to “sunset” in 2011, meaning big changes at the end of the year for many taxpayers. Well Jan. 1, 2011, is fast approaching and Congress has done nothing to extend or make permanent any of the expiring Bush tax cuts. We'll have to wait and see if Washington will act before Republicans take over Congress. Let us take a look at tax year 2010 versus tax year 2011 and see what is in store under current law if Congress lets all the provisions disappear on New Year's Day 2011. Photo Credit: David Reber

Ever since the passage of EGTRRA, tax pros have joked about the number of life-support plugs that would be pulled on Jan. 1, 2010, so that heirs could get more of their inheritance. Under the 2001 Act, the federal estate tax was repealed on Jan. 1, 2010. But due to the sunset provision it returns on Jan. 1, 2011. The estate tax is assessed on the net value of what a deceased person leaves behind – the individual’s assets less any outstanding liabilities. For 2009, the estate tax exemption was $3.5 million and the top tax rate was 45%. In 2011 the exemption drops to $1 million and the top rate jumps to 55%. For both 2009 and 2011 estates are allowed an unlimited marital deduction. While there were attempts made to bring back a revised estate tax for 2010 and to make the repeal permanent, Congress has so far done nothing to change the current or future status of the tax. Photo Credit: sridgway

While EGTRRA did not do away with the marriage tax penalty altogether, it did provide some relief for those in lower tax brackets. For 2010 the Tax Rate Schedule and Tax Table for the 10% and 15% brackets for a married couple filing a joint return are exactly double the same brackets for single filers — and these brackets for married persons filing separately are exactly the same as for single filers. For 2011 the bracket creep for a dual income married couple, whether filing jointly or separately, will occur much more quickly than for two single filers at all levels of income — increasing the marriage penalty on lower income couples. In 2010 the Standard Deduction for a married couple filing jointly is twice what it is for single filers. For 2011 this will not be true — the Single Standard Deduction will be more than half the deduction for married couples. Photo Credit: Hammer51012

The tax brackets established under EGTRRA are 10%, 15%, 25%, 28%, 33% and 35%. These are the tax brackets that will be in effect for 2010 tax returns. For 2011 the brackets will return to what they were in 2000 – 15%, 28%, 31%, 36% and 39.6%. The 10% bracket totally disappears! Every taxpayer will be hit with an automatic tax increase in 2011 – at least $419 for Single and separate filers, $598 for Head of Household filers and $838 for joint filers who would have been at the top of the former 10% bracket if the law did not sunset. Photo Credit: alancleaver_2000

For 2010 tax returns the maximum capital gains tax rate on profits from the sale of most investments held more than one year is 0% for taxpayers in the 10% and 15% brackets, and 15% for all others. These same special rates apply to “qualified” dividends. On Jan. 1, 2011, the capital gains rates revert back to 10% for those in the 15% bracket and 20% for all others. The 0% capital gains tax rate disappears. And all dividends, except for capital gain distributions, return to being taxed at ordinary income rates. If you are in the 28% bracket all your dividends will be taxed at the rate of 28%. Photo Credit: Katrina.Tuliao

Currently the maximum Child Tax Credit, available for each dependent child under age 17, is $1,000. The credit is phased out as adjusted gross income exceeds a certain threshold based on filing status. This $1,000 per child is available on the 2010 return. Prior to the passage of EGTRRA, the maximum Child Tax Credit was $500. And it will be $500 again for 2011. The income thresholds for phaseout remain the same; these amounts weren’t adjusted by the 2001 act. The tax bill for a family with three qualified children and an AGI under the phase-out threshold will automatically increase by $1,500! Photo Credit: limaoscarjuliet

EGTRRA phased out the Personal Exemption Phaseout (PEP) and Pease provisions — what I call the “Read My Lips Taxes” — so that for 2010, they are both repealed. There is no reduction of personal exemptions or itemized deductions based on AGI on the 2010 Form 1040. Both are back in full force for 2011. Personal exemptions can be reduced to “0” based on AGI, and itemized deductions claimed on Schedule A are reduced by 3% of the amount one’s AGI exceeds a certain threshold based on filing status. Photo Credit: Manchester Library

The Bush tax cuts are not the only ones that will expire on Dec. 31. The American Recovery and Reinvestment Act of 2009, President Obama’s economic stimulus package, gave us three tax credits available on 2010 tax returns that will not be allowed on 2011 Form 1040s - unless extended by Congress. The refundable Making Work Pay Credit provides up to $400 for single and $800 for married taxpayers with earned income. The American Opportunity Credit, 40% of which may be refundable, expanded the HOPE education credit. It provides up to $2,500 in tax relief per student for tuition and course materials paid for the first four years of college. The Residential Energy Credit gives taxpayers a non-refundable benefit equal to 30% of the cost of qualified energy-efficient purchases for or improvements to their primary personal residence, up to a maximum credit of $1,500. Photo Credit: transplanted mountaineer

The itemized deduction for mortgage insurance premiums also expires on Dec. 31, and will not be available in 2011 – unless extended by Congress. This deduction, claimed under the “interest” category on Schedule A, is phased out based on AGI. This deduction was introduced as a one-year measure in the Tax Relief and Health Care Act of 2006, an “extenders” bill passed at literally the last minute in 2006, and extended through 2010 via the Mortgage Forgiveness Debt Relief Act of 2007. Photo Credit: Editor_Tupp

Your Chance to Beat the Tax Man

In 2001 Congress passed a massive tax reform bill called the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which provided tax cuts to all Americans, in all income levels, via a multitude of changes to the tax code. These tax benefits have come to be known as the Bush tax cuts. These tax benefits were not made permanent, but instead were scheduled to “sunset” in 2011, meaning big changes at the end of the year for many taxpayers. Well Jan. 1, 2011, is fast approaching and Congress has done nothing to extend or make permanent any of the expiring Bush tax cuts. We'll have to wait and see if Washington will act before Republicans take over Congress. Let us take a look at tax year 2010 versus tax year 2011 and see what is in store under current law if Congress lets all the provisions disappear on New Year's Day 2011. Photo Credit: David Reber