Individual Income Tax2010 Update

Julie EmanueleKevin Klein

Ryan Thompson

Today’s PresentationToday’s Presentation

2010 Federal Update2010 Federal Update

Looking Forward: 2011 Federal ChangesLooking Forward: 2011 Federal Changes

2010 Virginia Update2010 Virginia Update

Looking Forward: 2011 Virginia ChangesLooking Forward: 2011 Virginia Changes

Elective Salary DeferralsElective Salary Deferrals

401(k) maximum elective deferral for 401(k) maximum elective deferral for 2010:2010:

– Under age 50: $16,500Under age 50: $16,500

– ““Catch up” contribution of $5,500 allowed if Catch up” contribution of $5,500 allowed if age 50 or olderage 50 or older

IRA ContributionsIRA Contributions

Maximum to a Traditional or Roth is $5,000Maximum to a Traditional or Roth is $5,000

Catch up contribution of $1,000 for Catch up contribution of $1,000 for taxpayers at least age 50 by the end of taxpayers at least age 50 by the end of 20102010

Have until due date of return (not including Have until due date of return (not including extension)extension)

Phase-out ranges different – see next slidePhase-out ranges different – see next slide

Phase-Out Range

    Single, HOH Married JointMarried Separate

Deductible Contributions

Taxpayer (and spouse) not covered by retirement plan

No Limit No Limit No Limit

Taxpayer is covered by a retirement plan

$56,000 - $66,000 $89,000 - $109,000 $0 - $10,000

 

Taxpayer is not covered but spouse is covered by retirement plan

N/A $167,000 - $177,000 $0 - $10,000

Nondeductible Contributions No Limit No Limit No Limit

Roth IRA Contributions $105,000 - $120,000 $167,000 - $177,000 $0 - $10,000

Health Savings AccountsHealth Savings Accounts

Pay out-of-pocket medical expenses with Pay out-of-pocket medical expenses with pre-tax incomepre-tax income

Fund an HSA account with direct transfer Fund an HSA account with direct transfer from IRAfrom IRA

Maximum Contribution of $3,050 for single Maximum Contribution of $3,050 for single coverage ($6,150 for family coverage)coverage ($6,150 for family coverage)

If 55 or older, additional $1,000 catch-up If 55 or older, additional $1,000 catch-up contribution is availablecontribution is available

Higher Education ExpensesHigher Education Expenses

Credit extended through 2012 by the Tax Relief, Credit extended through 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Unemployment Insurance Reauthorization, and Job Creation act of 2010Job Creation act of 2010

Deduction of up to $4,000 instead of Hope or Deduction of up to $4,000 instead of Hope or Lifetime Learning tax credits – extended through Lifetime Learning tax credits – extended through 20112011

Subject to phase outSubject to phase out

Education CreditsEducation CreditsAmerican Opportunity Tax CreditAmerican Opportunity Tax Credit

– Formerly known as Hope Scholarship creditFormerly known as Hope Scholarship credit– Maximum $2,500 credit perMaximum $2,500 credit per student student– First 4 years of undergraduate educationFirst 4 years of undergraduate education– Half time studentHalf time student– Phaseout begins at $80K for single filers ($160K for joint) Phaseout begins at $80K for single filers ($160K for joint)

and ends at $90K ($180K for joint)and ends at $90K ($180K for joint)

Lifetime Learning CreditLifetime Learning Credit– Maximum $2,000 credit per Maximum $2,000 credit per return– Available for unlimited number of years– Less than half time enrollment-non degree seeking

students– Phaseout begins at $51K for single filers ($102K for joint)

and ends at $61K ($122K for joint)

*Credit is taken on Form 8863

Qualified Educator ExpensesQualified Educator ExpensesAvailable for any Teacher, Instructor, Counselor, Available for any Teacher, Instructor, Counselor, Principal, or Aides teaching K-12 gradesPrincipal, or Aides teaching K-12 grades

Must work at least 900 hours during taxable yearMust work at least 900 hours during taxable year

Can deduct “above-the-line” up to $250 of Can deduct “above-the-line” up to $250 of expenses incurred for books and (non-athletic) expenses incurred for books and (non-athletic) suppliessupplies

Excess expenses of $250 can be deducted on Excess expenses of $250 can be deducted on Schedule A subject to 2% of AGISchedule A subject to 2% of AGI

Expires at end of 2011Expires at end of 2011

Sales & Use Tax DeductionSales & Use Tax Deduction

Available through 2011Available through 2011

Deduct either state income tax or sales Deduct either state income tax or sales and use taxand use tax

Use Receipts Method or Sales Tax TableUse Receipts Method or Sales Tax Table

Charitable Contribution Substantiation Charitable Contribution Substantiation

Some form of substantiation for charitable Some form of substantiation for charitable contributions must be retainedcontributions must be retained

Examples: Receipt, Letter Examples: Receipt, Letter from Charity, etc. from Charity, etc.

Deductions only available if taxpayer Deductions only available if taxpayer itemizes deductionsitemizes deductions

Distributions directly from IRA, expires in Distributions directly from IRA, expires in 2011 (discussed in more detail later)2011 (discussed in more detail later)

Residential Energy CreditsResidential Energy Credits

Nonbusiness Energy Property CreditNonbusiness Energy Property Credit– Credit equal to 10% of the cost of qualified Credit equal to 10% of the cost of qualified

energy efficiency improvements to principal energy efficiency improvements to principal residenceresidence

– Credit is limited to $500Credit is limited to $500– For property placed in service in 2011For property placed in service in 2011– Previous credits taken are deducted from the Previous credits taken are deducted from the

overall credit limitoverall credit limit

Kiddie TaxKiddie Tax

Now effects children ages 19-23 who are Now effects children ages 19-23 who are full time studentsfull time students

Earned income is less than half of supportEarned income is less than half of support

Investment income greater than $1,900Investment income greater than $1,900

2010 Capital Gains2010 Capital Gains

Capital gains that would have been taxed Capital gains that would have been taxed at 5% will not be taxed at allat 5% will not be taxed at all

Capital gains that would have been taxed Capital gains that would have been taxed at 15% will remain at 15%at 15% will remain at 15%

Will expire in 2013 when the 0% rates will Will expire in 2013 when the 0% rates will go to 10% and 15% rates will go to 20%go to 10% and 15% rates will go to 20%

Excluded Combat PayExcluded Combat Pay

Can elect to have excluded combat pay Can elect to have excluded combat pay count as earned income in the calculation count as earned income in the calculation for the earned income tax creditfor the earned income tax credit

Counts towards “compensation” for IRA Counts towards “compensation” for IRA contribution limitations & Making Work Pay contribution limitations & Making Work Pay Credit (discussed later)Credit (discussed later)

Roth IRA ConversionsRoth IRA Conversions

Limit on modified adjusted gross income of Limit on modified adjusted gross income of $100,000 lifted for all taxpayers beginning in $100,000 lifted for all taxpayers beginning in 20102010

Convert all or any portion of a Traditional, Convert all or any portion of a Traditional, SEP, or SIMPLE IRA into a Roth IRA during SEP, or SIMPLE IRA into a Roth IRA during 20102010

Retain option to recharacterize conversion Retain option to recharacterize conversion until due date of return (including extensions) until due date of return (including extensions)

Roth IRA ConversionsRoth IRA ConversionsElect to defer taxes on conversion until 2011 Elect to defer taxes on conversion until 2011 & 2012 (only available for conversions in & 2012 (only available for conversions in 2010) 2010)

Possible Benefits from ConvertingPossible Benefits from Converting– Enjoy Tax-Free Distributions in RetirementEnjoy Tax-Free Distributions in Retirement– Benefit from Tax-Free Earnings GrowthBenefit from Tax-Free Earnings Growth– Manage Personal Income Tax ImplicationsManage Personal Income Tax Implications– Take Advantage of Perfect 20/20 Hindsight with Take Advantage of Perfect 20/20 Hindsight with

Roth IRA Recharacterizations Roth IRA Recharacterizations

Making Work Pay CreditMaking Work Pay Credit

Enacted by the 2009 Recovery Act Enacted by the 2009 Recovery Act

Available for eligible taxpayers in 2010Available for eligible taxpayers in 2010

Refundable credit equal to lesser of: Refundable credit equal to lesser of: – 6.2% of taxpayer’s earned income6.2% of taxpayer’s earned income– $400 per individual ($800 married couples)$400 per individual ($800 married couples)

Begins phase out at $75,000 ($150,000 for Begins phase out at $75,000 ($150,000 for MFJ) in modified adjusted gross incomeMFJ) in modified adjusted gross income

Partial Payroll Tax HolidayPartial Payroll Tax HolidayTemporary reduction of Social Security Temporary reduction of Social Security payroll tax for wage earners and self-payroll tax for wage earners and self-employed individualsemployed individuals

During 2011, 2% reduction in FICA taxes During 2011, 2% reduction in FICA taxes

Applies to all individuals subject to Social Applies to all individuals subject to Social Security tax without regard to any limit on Security tax without regard to any limit on the wages or other income they receivethe wages or other income they receive

Employees will receive the benefit through Employees will receive the benefit through reduced withholdingreduced withholding

First-Time Homebuyer CreditFirst-Time Homebuyer Credit

Extended until April 30Extended until April 30thth, 2010 (or until , 2010 (or until October 1October 1stst, 2010 if binding contract , 2010 if binding contract agreed to before May 1agreed to before May 1stst, 2010) , 2010)

First-Time Homebuyers - Tax credit up to First-Time Homebuyers - Tax credit up to lesser of $8,000 or 10% of purchase pricelesser of $8,000 or 10% of purchase price

Long-Time Residents – Tax credit up to Long-Time Residents – Tax credit up to lesser of $6,500 or 10% of purchase pricelesser of $6,500 or 10% of purchase price

First-Time Homebuyer CreditFirst-Time Homebuyer Credit

Credit phased out when MAGI falls Credit phased out when MAGI falls between the following income levels between the following income levels (completely phased out at highest level)(completely phased out at highest level)– Single - $75,000 - $95,000Single - $75,000 - $95,000– Married filing Joint - $150,000 - $170,000Married filing Joint - $150,000 - $170,000

No credit for purchases exceeding No credit for purchases exceeding $800,000 – no phase out available here$800,000 – no phase out available here

Refundable, but also can be Recaptured Refundable, but also can be Recaptured

Standard DeductionStandard Deduction2010 Applicable Standard Deduction: 2010 Applicable Standard Deduction: – Single - $5,700Single - $5,700– HOH - $8,400HOH - $8,400– Joint (or surviving spouse) - $11,400Joint (or surviving spouse) - $11,400

Real Estate Taxes up to $500 (single) or Real Estate Taxes up to $500 (single) or $1,000 (joint) can $1,000 (joint) can no longerno longer be added be added onto the effective standard deductiononto the effective standard deduction

Unemployment CompensationUnemployment Compensation

Federal Law – Can Federal Law – Can no longerno longer exclude up to exclude up to $2,400 of unemployment compensation $2,400 of unemployment compensation benefits received during from taxable benefits received during from taxable income – all benefits are now taxableincome – all benefits are now taxable

Virginia Law – Can exclude all unemploy-Virginia Law – Can exclude all unemploy-ment compensation benefits received ment compensation benefits received during 2010 year from taxable incomeduring 2010 year from taxable income

COBRA SubsidyCOBRA Subsidy

Provides a 65% subsidy for COBRA Provides a 65% subsidy for COBRA continuation premiums for up to 15 monthscontinuation premiums for up to 15 months

Applies to workers who were involuntarily Applies to workers who were involuntarily terminated between Sept. 1, 2008 and terminated between Sept. 1, 2008 and May 31, 2010May 31, 2010

Taxable income for year cannot exceed Taxable income for year cannot exceed $125,000 (single) or $250,000 (joint)$125,000 (single) or $250,000 (joint)

Subsidy is non-taxableSubsidy is non-taxable

Job Hunting ExpensesJob Hunting ExpensesExpenses incurred searching for new Expenses incurred searching for new employment in same trade or business are employment in same trade or business are deductible as miscellaneous itemized deductible as miscellaneous itemized deductions subject to 2% limitationdeductions subject to 2% limitation

Examples:Examples:– Employment Agency FeesEmployment Agency Fees– Resume Preparation ServicesResume Preparation Services– Travel & Transportation Fees (Unreimbursed)Travel & Transportation Fees (Unreimbursed)– Employment CounselingEmployment Counseling

Estate, Gift, & GST TaxesEstate, Gift, & GST Taxes

Temporarily reinstates and modifies the Temporarily reinstates and modifies the estate and GST taxes retroactive to the estate and GST taxes retroactive to the beginning of 2010, modifies gift tax beginning of 2010, modifies gift tax beginning in 2011beginning in 2011

Estates of decedents dying in 2010 can Estates of decedents dying in 2010 can elect out and use former law – zero rate elect out and use former law – zero rate and modified carryover basisand modified carryover basis

Rules apply through 2012Rules apply through 2012

Estate, Gift, & GST TaxesEstate, Gift, & GST Taxes

New estate tax regime New estate tax regime – Exemption of $5 million per spouseExemption of $5 million per spouse– Flat rate 35%Flat rate 35%– Exemption will be indexed for inflation beginning in Exemption will be indexed for inflation beginning in

20122012

PortabilityPortability– A decedent’s unused estate exemption will transfer to A decedent’s unused estate exemption will transfer to

the surviving spousethe surviving spouse– Executor of deceased spouse’s estate must compute Executor of deceased spouse’s estate must compute

the unused amount and make an election to grant it to the unused amount and make an election to grant it to surviving spousesurviving spouse

Estate, Gift, & GST TaxesEstate, Gift, & GST Taxes

Gift Tax – for next 2 years, 35% flat rate Gift Tax – for next 2 years, 35% flat rate and exemption will be reunified at $5 and exemption will be reunified at $5 million after 12/31/10million after 12/31/10– Act clarifies that the credit permitted with Act clarifies that the credit permitted with

respect to prior taxable gifts to determine respect to prior taxable gifts to determine current year liability is determined by rate current year liability is determined by rate structure in effect on date at which the credit structure in effect on date at which the credit is being determined, not rate structure in is being determined, not rate structure in effect when gift was madeeffect when gift was made

Estate, Gift, & GST TaxesEstate, Gift, & GST TaxesGST reinstated for decedents dying and transfers GST reinstated for decedents dying and transfers made after 12/31/09made after 12/31/09

Exemption for 2011 and 2012 is $5 millionExemption for 2011 and 2012 is $5 million

GST tax rate for transfers made after 2010 is GST tax rate for transfers made after 2010 is equal to highest estate and gift rate is effect for equal to highest estate and gift rate is effect for such yearsuch year

In 2010, GST tax applies, but rate is 0%, In 2010, GST tax applies, but rate is 0%, exemption is $5 millionexemption is $5 million

Due date for returns with transfers 1/1/10 through Due date for returns with transfers 1/1/10 through 12/17/10 is 9 months from date of enactment12/17/10 is 9 months from date of enactment

Individual Income Tax ReliefIndividual Income Tax Relief6 rate brackets from 10-35% will remain in 6 rate brackets from 10-35% will remain in placeplace

15 % top rate on qualified dividends and 15 % top rate on qualified dividends and long-term capital gains, 0% for those in long-term capital gains, 0% for those in lowest 2 rate bracketslowest 2 rate brackets

In 2013, income tax rates return to pre-In 2013, income tax rates return to pre-EGTRRA levels – highest rate 39.6%EGTRRA levels – highest rate 39.6%– Capital gain rates return to 10 and 20%Capital gain rates return to 10 and 20%– Dividends taxed as ordinary incomeDividends taxed as ordinary income

Individual Income Tax ReliefIndividual Income Tax Relief2 year extension of repeal of personal 2 year extension of repeal of personal exemption phaseout and itemized deduction exemption phaseout and itemized deduction limitationlimitation

Marriage penalty relief extended through 2012 – Marriage penalty relief extended through 2012 – increase in standard deduction and increase in increase in standard deduction and increase in size of rate bracketssize of rate brackets

$1,000 Child credit extended through 2012 – $1,000 Child credit extended through 2012 – with increased refundabilitywith increased refundability

AMT “patch” extended for 2010 and 2011 – AMT “patch” extended for 2010 and 2011 – exemption of $72,450 and $74,450 MFJexemption of $72,450 and $74,450 MFJ

Individual Income Tax ReliefIndividual Income Tax Relief

– Increase in adoption credit and income Increase in adoption credit and income exclusion for employer provided assistance to exclusion for employer provided assistance to $10,000$10,000

– Employer-provided child care tax credit equal to Employer-provided child care tax credit equal to 25% of qualified expenses for employee child 25% of qualified expenses for employee child care and 10% of qualified expenses for child care and 10% of qualified expenses for child care resource and referral servicescare resource and referral services

– Increase in percentage rate, maximum limit, Increase in percentage rate, maximum limit, and phase-down of dependent care creditand phase-down of dependent care credit

Individual Income Tax ReliefIndividual Income Tax Relief

– Extends EITC increases and modifications Extends EITC increases and modifications under EGTRRA and ARRAunder EGTRRA and ARRA

– $5,250 annual employee exclusion for employer $5,250 annual employee exclusion for employer provided educational assistance, includes provided educational assistance, includes graduate coursesgraduate courses

– Expansion of student loan interest deduction Expansion of student loan interest deduction beyond 60 months and increased income beyond 60 months and increased income phase-out rangephase-out range

– Tax-free distribution for IRA for charitable Tax-free distribution for IRA for charitable purposes for individuals 70 ½ and olderpurposes for individuals 70 ½ and older

Additional 2010 Return InfoAdditional 2010 Return Info

Filing deadline is April 18, 2011Filing deadline is April 18, 2011

For 2010, self-employed people can use For 2010, self-employed people can use SE health insurance to reduce their social SE health insurance to reduce their social security liability as well as income taxsecurity liability as well as income tax

Small business must use EFTPS for Small business must use EFTPS for federal tax depositsfederal tax deposits

Looking forward: 2011Looking forward: 2011

Elective deferrals contribution limits will Elective deferrals contribution limits will remain the same as 2010remain the same as 2010

IRA contributions will remain the same as IRA contributions will remain the same as 20102010

Expiring adjustments, credits, and Expiring adjustments, credits, and deductionsdeductions

Virginia UpdateVirginia Update

Virginia Sales Tax HolidaysVirginia Sales Tax Holidays

Certain Virginia Deductions and Tax CreditsCertain Virginia Deductions and Tax Credits

Looking Forward: 2011 & BeyondLooking Forward: 2011 & Beyond

Virginia Sales Tax HolidaysVirginia Sales Tax Holidays

May 25-31, 2011 – Hurricane Preparedness May 25-31, 2011 – Hurricane Preparedness EquipmentEquipment

August 5-7, 2011 – School Supplies, August 5-7, 2011 – School Supplies, Clothing & Footwear Clothing & Footwear

October 7-10, 2011 – Energy Star Qualified October 7-10, 2011 – Energy Star Qualified ProductsProducts

Virginia Livable Home CreditVirginia Livable Home CreditCredit for supplies purchased and other items Credit for supplies purchased and other items needed to retrofit existing residences with needed to retrofit existing residences with accessibility and/or visitability featuresaccessibility and/or visitability features

Also applies to supplies needed to Also applies to supplies needed to incorporate features into new constructionincorporate features into new construction

For tax year 2010, maximum amount is For tax year 2010, maximum amount is $2,000, double the 2009 maximum$2,000, double the 2009 maximum

Community of Opportunity Community of Opportunity Tax CreditTax Credit

Landlords may qualify for an individual or Landlords may qualify for an individual or corporate tax credit equal to 10% of the corporate tax credit equal to 10% of the fair market value of rentfair market value of rent

Replaces the Low Income Housing Tax Replaces the Low Income Housing Tax CreditCredit

Green Jobs Creation Tax CreditGreen Jobs Creation Tax Credit

VA individuals, corporations, and pass-through entities VA individuals, corporations, and pass-through entities eligible to claim $500 credit for each new “green” job eligible to claim $500 credit for each new “green” job createdcreated

"Green” job means employment in industries relating "Green” job means employment in industries relating to the field of renewable, alternative energiesto the field of renewable, alternative energies

Each job must pay $50,000 or moreEach job must pay $50,000 or more

Maximum of 350 qualified jobs per employerMaximum of 350 qualified jobs per employer

Effective January 1, 2010 to January 1, 2015Effective January 1, 2010 to January 1, 2015

Federal and State Salary Subtraction

Only individuals earning less than $15,000 in wages are entitled to subtraction

Effective For: Employees of state-supported universities, colleges, and community colleges and other state and federal agencies

Not Effective For: Employees of Local Government, U.S. Postal Service, Army, Navy, Air Force, Marines, and National Guard

College Savings PlansCollege Savings Plans

Allowable deduction for contributions to college Allowable deduction for contributions to college savings account is $4,000 per plan or accountsavings account is $4,000 per plan or account

There are currently no restrictions on deduction There are currently no restrictions on deduction amounts for individuals who are 70 or olderamounts for individuals who are 70 or older

Household EmployersHousehold Employers

Household employers may now elect to file Household employers may now elect to file and pay household Virginia employment and pay household Virginia employment taxes annuallytaxes annually

Looking ForwardLooking Forward

Increase in the filing threshold in VirginiaIncrease in the filing threshold in Virginia

Filing Status 2010 & 2011 2012 & Beyond

Single or MFS $11,650 $11,950

MFJ $23,300 $23,900

Virginia Tax Department Virginia Tax Department ServicesServices

e-Subscriptionse-Subscriptions– Customized e-mails on a variety of state tax topicsCustomized e-mails on a variety of state tax topics

Live ChatLive Chat– Available weekdays from 8 a.m. to 8 p.m.Available weekdays from 8 a.m. to 8 p.m.

SummarySummary

2010 Federal Updates2010 Federal Updates

Looking Forward: 2011 Federal ChangesLooking Forward: 2011 Federal Changes

2011 Virginia Updates2011 Virginia Updates

Looking Forward: 2011 Virginia ChangesLooking Forward: 2011 Virginia Changes

QuestionsQuestionsJulie EmanueleJulie Emanuele– Phone: 804-433-1084Phone: 804-433-1084– Email: Email: jemanuele@theroselinegroup.com

Ryan ThompsonRyan Thompson– Phone: 804-545-7458Phone: 804-545-7458– Email: Email: rthompson@theroselinegroup.com

Kevin KleinKevin Klein– Phone: 804-545-7459Phone: 804-545-7459– Email: Email: kklein@theroselinegroup.com

www.theroselinegroup.comwww.theroselinegroup.com