Becker CPA Review End of Year 2010 Income Tax Law Update 2011 Edition Textbook

In December 2010 Congress approved, and the President signed, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act). URL: <http://www.govtrack.us/congress/billtext.xpd?bill=h111-4853>. This law (i) enacted significant changes to the income tax provisions of the Internal Revenue Code (IRC) and (ii) extended many income tax provisions which had expired after December 31, 2009. Set forth below is a summary of those changes and extenders. Also set forth below are summaries of recent IRS updates to various topics discussed in the textbook. This information is testable on the CPA exam starting on July 1, 2011 Updates to R1
Page Number R1-10 I Item Number Update The new law provides that the no phase-out of personal exemptions will continue for years 2011 and 2012. For 2011 the monthly maximum exclusion for employer-provided parking remains at $230. For 2011 the monthly maximum exclusion for employer-provided transit passes remains at $230. Per IRS Revenue Procedure 2010-40 the year 2011 phase-outs for Series EE bond interest income exclusion begin at $71,100 for single and head of household and at $106,650 for MFJ filers. MFS filers cannot claim any exclusion. The $950 and $1,900 amounts also apply to year 2011. This chart also applies for year 2011. These qualified dividend tax rates also apply to years 2011 and 2012. Delete the current text in the note and replace with the following: For 2011 and 2012 qualified dividends will continue to be taxed at the year 2010 tax rates set forth above in item 1

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g.(3) g.(4)

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2.c.(2)

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3. The table above item 4. (c) The Note in the box above item B.

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2.e 4.a.(2)(a) and 4.a.(2)(c) 4.a.(2)(c)

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P.7. The Note at the bottom of the page 3.a.

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a.

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a. and b.

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The Note below item E.1.a.(2)

(c). The standard mileage rate for 2011 is 51 cents per mile. The Social Security Administration has announced that the year 2011 self-employment income ceiling will remain at $106,800. The new law provides that for year 2011 the 12.4% rate is reduced to 10.4% rate. However, the deduction for one-half the self-employment tax (see page R1-29 at item 4.a.(2)(a)) will continue to be (i) 7.65% of self-employment income up to $106,800 and (i) 1.45% of selfemployment income in excess of $106,800. For 2011 the maximum foreign-earned income exclusion is $92,900. For 2011 the maximum foreign housing exclusion is $27,870, which is 30% of $92,900. An estate of a decedent dying in 2010 can elect to apply the post-2010 law requiring step-up (or step-down) basis. Delete (i) the first sentence of this paragraph and (ii) Thus at the beginning of the second sentence. An estate of a decedent dying in 2010 can elect to apply the post-2010 law requiring step-up or step-down basis (see above regarding item 3.a. on page R1-54). If the estate makes the election, then (i) the Year 2010 General Rule (discussed at item a on page R1-55) does not apply and (ii) the Year 2010 Gain Exclusion (discussed at item b. on page R1-55) does not apply. This Note does not apply to years 2011 and 2012.

Updates to R2
Page Number Item Number R2-4 B.1 Update Delete the bracketed text in this paragraph. The educator expense deduction has been extended to 2

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c.(1)

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c.(2)(b)

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d.(1)

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d.(2) f (Table)

years 2010 and 2011. For 2011 the phase-out range for excessive Modified AGI related to IRAs is $56,000-$66,000 for Single and Head of Household (no change from 2010); $90,000 - $110,000 for Married Filing Jointly; and 0 - $10,000 for Married Filing Separately (but if the spouses live apart all year, each is treated as Single for purposes of the IRA phase-out). For 2011 the maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is, is phased out (i) for MFJ taxpayers with modified AGI between $169,000 and $179,000 and (ii) for MFS taxpayers with modified AGI between -0- and $10,000 (but if the spouses live apart all year, each is treated as Single, and this rule does not apply). For 2011 the maximum deduction for an IRA is still limited to the lesser of $5,000 (no change from 2010) or the individuals compensation. For married taxpayers filing jointly in 2011, the limits are still $10,000 ($5,000 for each spouse).. For 2011 the following changes apply to the MAGI column (for the table and the notes beneath the table): 2011 M.A.G.I. Column 1. Unlimited 2. Unlimited 3. Under $90,000* 4. $110,000 $169,000** 5. Over $179,000 --------------------* Regarding the single asterisk sentence below the table, change $89,000 and $109,000 to $90,000 and $110,000, respectively. ** Regarding the double asterisk sentence below the table, change $167,000 and $177,000 to $169,000 and $179,000, respectively. NOTE: This table applies only to MFJ filers. For 2011 the additional catch-up contribution for an IRA is still $1,000. The Roth contribution limits for 2011 are still $5,000 for single taxpayers and $10,000 for married taxpayers.

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g d

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.e

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4.a.(1) d.(2) (3) at top of the page

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Chart above D. D

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E.1.

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F.1

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F.3 a. at the top of the page 4.c. 4.d.

The phase-out ranges for contributions to a Roth IRA in 2011 are (i) $107,000 to $122,000 for single taxpayers, H of H taxpayers, and MFS taxpayers who lived apart all year and (ii) $169,000 to $179,000 for MFJ taxpayers. The MFS range remains the same (-0- to $10,000) for MFS spouses who did not live apart all year. The non-deductible contribution limitation of $5,000 remains the same for 2011. The $2,000-per-beneficiary maximum amount remains the same for 2011 and 2012. The year 2011 Coverdell ESA phase-outs are the same as the 2011 phase-outs. For purposes of the phase-out, H of H filers and MFS filers are considered to be single. For 2011 the maximum contributions remain the same as for 2010. For 2011 and 2012 the adjustment for student loan interest is still limited to $2,500. The year 2011 phase-out range is the same as the year 2010 phaseout range. The adjustment for qualifying tuition and related expenses paid has been extended through 2011; the maximum remains at $4,000. Delete the bracketed text immediately above item E.2. The Health Savings Accounts (HSAs) maximum amounts set forth in the text apply to year 2011, too. The HSA high deductible plan amounts set forth in the text apply to year 2011, too. The HSA out-of-pocket limitation amounts set forth in the text apply to year 2011, too. For 2011 change $3,000 and $6,050 to $3,050 and $6,150, respectively. For 2011 change $2,000 single/$4,050 family to $2,050 single/$4,100 family. For 2011 change $4,050 single/$7,400 family to $4,100 single/$7,500 family. For 2011 transportation expenses for moving are deductible at either actual out-of-pocket amounts or 19 cents per mile. For 2011 the maximum annual deductible amount for a Keogh plan remains at $49,000.

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3.a(1)

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J.1

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J.2.

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III.A.1

For 2011 the maximum annual Keogh maximum annual addition remains at $49,000. So, based upon (i) item J.1 on page R2-13 and (ii) item J.2. on page R2-14, the potential total contribution can be as high as $98,000 in each of years 2010 and 2012. For 2011 the additional standard deduction for the elderly or the blind is (i) $1,150 for married taxpayers whether filing MFJ or MFS and $1,450 for single and head of household taxpayers. These amounts are doubled if the taxpayer is both blind and elderly. Change the chart as follows: $1,400 becomes $1,450. $2,800 becomes $2,900. $1,100 becomes $1,150. $2,200 becomes $2,300. $4,400 becomes $4,600. By the way, for tax purposes an individual is considered to be age 65 on the day before s/he actually turns 65. So, a taxpayer whose 65th birthday is January 1, year X2 is considered to be age 65 on December 31, year X1. The $950 amount and the $300 amount for year 2010 apply to year 2011, too. The new law did not extend to year 2010 or to subsequent years the additional standard deduction for real estate taxes. The new law provides that the no phase-out of itemized deductions will continue for years 2011 and 2012. So, the limitation discussed in item B.1. will not apply to years 2011 or 2012 (as well as not applying to year 2010). For 2011 the allowance for medical mileage is 19 cents per mile. The sales tax deduction has been extended through 2011 The deductibility of mortgage insurance premiums has been extended for premiums paid on or before December 31, 2011. Note that the insurance must be with respect to contracts entered after December 31, 2006. The standard mileage allowance for transportation expenses for 2011 is 51 cents per mile.

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2. 3.

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B.1.

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d(5)(b) (4) at the top of the page (3)

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(2)

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I.A. Pass Key

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B. at the bottom of the page

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2.

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D.1.

The 2010 tax rates will continue through 2012. The reduced tax rates will apply through year 2012. So, delete the last sentence in the Pass Key (that sentence begins with However) For 2011 and 2012 maximum percentage of 35% and the amount of the maximum expenditures for the child and dependent care credit remain the same as in 2010. At the beginning of the next to the last line of the paragraph, insert after 2010 and before the closed parenthesis the following: and 2011 and 2012. The American Opportunity Credit has been extended through 2012. So, wherever 2010 appears in D.1.a. through D.1.g., insert immediately after 2010 the following: and 2011 and 2012. Note that MFS filers cannot claim this credit. The year 2011 Lifetime Learning Credit phase-out amounts are the same as the year 2010 phase-out amounts. Note that MFS filers cannot claim this credit, Here are the Modified AGI phase-out amounts for year 2011: U.S. Savings Bonds Series EE $ 71,100 - $ 86,100 $106,650 - $136,650 (MFJ) No exclusion for MFS filers Coverdell ESA $ 95,000 - $110,000 $190,000 - $220,000 (MFJ)

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e. at the top of the page

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Table at top of the page

Student loan interest deduction $ 60,000 - $ 75,000 $120,000 - $150,000 (MFJ) No deduction for MFS filers Tuitions and fees deduction $ 65,000 - $ 80,000 $130,000 - $160,000 (MFJ) No deduction for MFS filers Hope Scholarship credit $ 80,000 - $ 90,000 $160,000 - $180,000 (MFJ)

No credit for MFS filers Lifetime Learning credit

$ 50,000 - $ 60,000 $100,000 - $120,000 No credit for MFS filers

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F.1 F.2 c. (at the top of the page) 5. (near the top of the page) G.2 (Table)

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For 2011 the limit for the adoption credit for all children is $13,360 per child. For 2011 the credit is phased out for modified AGI between $185,210 and $225,210. For 2011 the exclusion is $13,360 rather than $13,170, and for 2011 the modified AGI phase-out is between $185,210 and $225,210. The credit is also available in 2012 but will not be refundable, and the maximum credit per child will be $12,170, adjusted upwards for inflation. With respect to the table, here are the thresholds for year 2011: Change $33,000 to $34,000. Change $16,500 to $17,000. Change $33,001 - $36,000 to $34,001 - $36,500 Change $16,501 - $18,200 to $17,001 - $18,250. Change $36,001 - $55,500 to $$36,501 - $56,500. Change $18,001 - $27,750 to $18,251 - $28,250. Change Over $55,500* to Over $56,500* Change Over $27,750* to Over $28,250*. With respect to the asterisk text below the table, for year 2011 the credit is phased out when AGI exceeds $56,500 for joint return filers, $42,375 for heads of household, and $28,250 for married filing separately taxpayers and for single taxpayers. This computation is extended through 2012. Wherever 2010 appears in these items, insert and 2011 and 2012. The residential energy credit is extended for one year. However, the credit rate is reduce from 30% (for 2010) to 15% (for 2011). The credit for year 2011 is limited to $500 reduced by energy credits claimed in previous years. Earlier years limits for individual items are restored (e.g., the $200 limit for windows). For 2010 the exemption amounts are as follows:

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4.b 4. and 5. R

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B.

Single and H of H $47,450 less 25% X (AMTI -$112,500) MFJ $72,450 25% X (AMTI - $150,000) MFS $36,335 25% X (AMTI -$75,000)

For 2011 the exemption amounts are as follows: Single and H of H $48,450 less 25% X (AMTI -$112,500) MFJ $74,450 25% X (AMTI - $150,000) MFS $37,335 25% X (AMTI -$75,000) For 2010 and 2011 taxpayers can reduce their AMT liability by the full amount of their nonrefundable personal tax credits (see listing at the top of page R2-35). For 2011 the 50%-of-self-employmentadjustment will be computed as if the selfemployment tax rate were 12.4%. So the adjustment with respect to the first $106,800 of self-employment income will be X (12.4% + 2.9% medicare rate) X up to $106,800. The adjustment with respect to self-employment wages in excess of $106,800 will be X 2.9% X (selfemployment wages - $106,800).

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G.

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II

Updates to R3
Page Number R3-28 Item Number B.4. [new item] Update 15-year depreciation is available through 2011 for qualified real property: certain leasehold improvements, certain restaurant property, and certain retail improvement property The new law retroactively extends for two years, through 2011, the special seven-year depreciation period for property used for land improvements and for support facilities at motorsports entertainment complexes. Delete the item topic and the sentence immediately thereunder. Replace with the following item topic: Expensing and Bonus Depreciation Delete all of the material for C.1., C.1.a, C.1.b., C.1.c., C.1.c.(1), and C.1.c.(2). Replace with the following: For tax years 2010 and 2011 the taxpayer can expense up to $500,000 of the cost of qualifying property (generally, up tp $250,000 of qualified real property, defined at B.4., above; personal property and computer software). This maximum expensing amount is reduced dollar-for-dollar if the taxpayer purchases and places in service during the year more than $2,000,000 of qualifying property. For tax year 2012 the maximum expensing is $125,000 with a reduction threshold of $500,000. Both these amounts will be indexed for inflation. No real estate will qualify. For post-2012 tax years, the maximum expensing is $25,000 with a reduction threshold of $200,000. These amounts will not be indexed for inflation. No real estate will qualify. The cost of computer software is not eligible for expensing after 2012. Delete all of the material for C.2., C.2.a, and C.2.b. Replace with the following:

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B.5. [new item]

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C.

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C.1.

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C.2.

Bonus depreciation is extended through 2012. The depreciation rate is 50% for assets placed in service before September 9, 2010. The rate is increased from 50% to 100% (full write-off) for new, qualified assets acquired and placed in service after September 8, 2010 and before January 1, 2012. The depreciation rate is 50% for assets placed in service after December 31, 2011 and before January 1, 2013. The $8,000 additional first-year depreciation for vehicles on which bonus depreciation has been claimed continues through 2012. Bonus depreciation is not an adjustment for, or a preference for, AMT purposes. Bonus depreciation is claimed after the depreciation expense deduction discussed at item C.1. For qualified small business stock acquired after August 10, 1993 and before February 18, 2009, 50% of the gain (with certain limitations) can be excluded from tax if the stock is held for more than five years. For stock acquired after February 17, 2009 and before September 28, 2010 (rather than by 12/31/10 as set forth in the text), 50% becomes 75%. For stock acquired after September 27, 2010 and before January 1, 2012, the exclusion percentage is 100%. Generally, S corporation stock will not be qualified small business stock.

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E.

Updates to R4
[Please see the separate file posted online for Estate and Gift Taxation.]

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