This document summarizes the major tax legislation passed in 2010 and how it affects individuals and businesses. Key points include: - The Tax Relief Act of 2010 extended the Bush-era tax cuts through 2012, keeping income tax rates at 2010 levels. - It maintained the 15% capital gains and dividend tax rates and increased estate tax exemptions to $5 million through 2012. - Business provisions like bonus depreciation deductions and R&D tax credits were also extended through 2011. - The Social Security payroll tax was reduced to 4.2% for employees for 2011 only. Medicare taxes increased for high-income individuals starting in 2013. - Incentives like section 179 expensing were increased

1. How the New Tax Changes Affect You“Lunch and Learn”Keller Williams Training Room11700 Plaza America Dr.Suite 150Reston, VA 20190January 27, 20111

2. IntroductionIn 2010, there were three major pieces of legislation passed:Patient Protection and Affordable Care Act (“PPACA”) signed into U.S. law by President Barack Obama on March 23, 2010. Along with the Health Care and Education Reconciliation Act of 2010 (signed into law on March 30, 2010) – AKA Obamacare.

3. Small Business Jobs Act of 2010 (“Jobs Act”) signed into U.S. law on Sept. 27, 2010.

4. Tax Relief, Unemployed Insurance Reauthorization and Job Creation Act of 2010 signed into law by President Obama on December 18, 2010 (“Tax Relief Act”).Various tax provisions in the legislations created or expanded deductions and credits and extended the Bush-era tax cuts for individuals, self-employed and businesses (small and large).Tax areas impacted include:Income taxes and rates,

5. Capital gains taxes,

6. Estate taxes,

7. Federal Insurance Contributions Act (FICA), and

8. Medicare.2

9. Income Tax ProvisionsPrior to December 18th, the individual income tax rates were scheduled to increase: Scheduled for 2011: tax rates increase to 15%, 28%, 31%, 36% and 39.6%.

10. Tax Relief Act Results: rates remain at 10%, 15%, 25%, 28%, 33% and 35%, respectively in 2011 and 2012.

11. Duration: December 31, 2012.

12. Opportunity: If you made an IRA to Roth-IRA Conversion in 2010, you can extend out two-year payment at same income tax rate as 2010.Itemized deduction and exemptions for higher-income individuals – AKA “Phase-outs”In 2010: no phase-outs on deductions or exemptions for higher income individuals.

13. Scheduled for 2011:

14. limitations that reduce itemized deductions.

15. limitations on reduced or eliminated the exemption deduction.

16. Tax Relief Act Results: removed the limitations on phase outs for higher-income individuals.

17. Duration: only extended for tax years 2011 and 2012.Notes3

18. 4Income Tax Provisions (2)Long term capital gains tax rates were scheduled to increase Scheduled for 2011: Increase to 20%.

19. Tax Relief Act Results: Long term capital gains rate will remain at 15% (0% for those taxpayers in 10% and 15% income tax brackets).

20. Duration: Until December 31, 2012.

21. Short term capital gains rates remain at individual’s income tax bracket level.Qualified dividendsScheduled for 2011: Increase to individual’s ordinary income tax rate.

22. Tax Relief Act Results: Qualified dividend tax rate will remain at 15% (0% for those taxpayers in 10% and 15% income tax brackets).

23. Duration: December 31, 2012.

24. Ordinary dividends still taxed at individual’s ordinary income tax rate.Notes

25. 5Alternative Minimum Tax (AMT)Tax Relief Act inserted the AMT patch for 2010 and 2011 from affecting middle-income taxpayers.For 2010: the exemption amounts increase to:Single filers: $47,450.

26. Joint filers: $72,450.

27. Married filing separately: $36,225.For 2011: the exemption amounts increase to:Single filers: $48,450.

28. Joint filers: $74,450.

29. Married filing separately: $37,225.Also for 2010 and 2011, many nonrefundable personal tax credits will be allowed to offset the AMT.Notes

30. 6Tax Relief Act of 2010 Provisions for IndividualsThe following provisions were extended until December 31, 2012:American Opportunity Tax Credit – qualified education expenses paid during all four years of post-secondary education.

31. Coverdell Education Savings Account – retained $2,000 contribution amount and ability to take tax-free distributions for qualified education expenses.

32. Exclusion of up to $5,250 for employer-provided education assistance, including tuition assistance for graduate school.

33. Credit for employer-provided child care facilities.

34. Retain 2,500 above-the-line student loan interest deduction.

35. Extend earned income tax credit.

36. Credit up to $2,100 for household and dependent care expenses for children under 13 and incapacitated dependents.

37. Tax credit of $1,000 per child under the age of 17Only extended to December 31, 2011:Rule allowing premiums for mortgage insurance to be deductible as interest that is qualified residence interest.Notes

38. 7Other Provisions Affecting IndividualsCharitable contributions from IRAs.Those over age 70 ½ will be able to make charitable contributions from an IRA without the need to include the distribution in income and claim charitable deduction.

39. Contributions made in January 2011 to be treated as being made on December 31, 2010.Credit for Energy-efficient improvements30% tax credit of the cost of energy-saving home improvements (e.g. new furnace) was extended by the Tax Relief Act until December 31, 2011.Miscellaneous:$250 above-the-line deduction for certain expenses of elementary and secondary school teachers.

40. Election to claim an itemized deduction for state/local sales tax in lieu of itemized deduction for state/local income taxes.

41. Increased monthly exclusion for employer-provided transit and van pool benefits to the amount of the exclusion for employer-provided parking benefits.

42. Above-the-line deduction for qualified tuition and related expenses.

43. Adoption credit for qualified adoption expenses or exclusion of employer-provided assistance as income.Notes

44. 8Business Tax Relief Act of 2010 ProvisionsThe following provisions are extended through December 31, 2011:Research credit.

45. New markets tax credit.

46. Employer wage credit for activated reservists.

47. 15 year write-off for qualified leasehold improvements.

48. 7 year write-off for motorsports entertainment facilities.

49. Enhanced charitable deductions for donations to public schoolsWork Opportunity Tax Credit:Scheduled for 2011: Set to expire on August 31, 2011.

50. Tax Relief Act Results: extends the credit to employees who begin employment before January 1, 2012.

51. Does not apply to unemployed veterans and disconnected youthNotes

52. 9Energy-related Tax ProvisionsEnergy-related provisions:Numerous biodiesel credits.

53. Credits for manufacturing of energy-efficient residential homes.

54. $.50/gal alternative fuel tax credit – but not for pulp.

55. Credit for U.S. based manufacture of energy-efficient clothes washer, dishwashers, refrigerators (std. modified).

56. 30% investment tax credit for alternative vehicle refueling property.Notes

57. 10FICA Tax Changes for 2011Social Security Payroll Relief for 2011 onlyReduction of 2%, from 6.2% to 4.2% of Social Security payroll tax in 2011.

58. Only applies to employee/wager earner portion of payroll tax

59. Employer portion of payroll tax will remain at 6.2%

60. Individual earning at or above Social Security cap of $106,800 will receive $2,136 tax benefit.

61. Self-employed Social Security payroll tax for 2011 will drop from 12.4% to 10.4%

62. Issue: what happens at the end of 2011?Notes

63. 11Medicare Tax ProvisionsMedicare Tax for 2011:The 2.9% of the Medicare portion of FICA tax (1.45% employee and 1.45% employer) still applies to all wages and self-employment income (i.e., still no annual ceiling).Medicare Tax starting in 2013: individuals earning more than $200,000 per year ($250,000 for married couples filing jointly), Medicare Tax rate increases by 0.9% on excesses over these exemption levels on wage earner’s portion of income.

64. Only impacts Employee’s portion going from 1.45% to 2.35%.

65. There is no increase to the Employer’s Medicare Tax.

66. Self-employed see increase from 2.9% to 3.8%.Additional Medicare Tax for 2013 (from “PPACA”) : 3.8% Medicare tax applied on non-salaried income of taxpayers with adjusted gross income exceeding certain thresholds (200K single, 250K couple). Income would includeUnearned Income – e.g. rentCapital GainsQualified dividendsNotes

67. 12Incentives to Invest in MachineryThe bonus 1st yr. depreciation percentage goes from 50% to 100% for qualifying property, including machinery and equipment acquired and placed in service after 9/8/2010 and before 1/1/2012.50% bonus 1st yr. depreciation allowance is extended an add’l year for eligible property placed in services after 12/31/11 and before 1/1/13. For either, to qualify property must be new and must either:Have an applicable MACRS recovery period of 20 yrs. or less.

68. Be water utility property.

69. Be computer software not covered by Sec. 179 amortization rules.

70. Be qualified leasehold improvement property.Election to accelerate the AMT credit instead of claiming additional 1st year depreciation extended until 12/31/12.Notes

71. 13Incentives to Invest in MachineryFor tax years beginning after December 31, 2011. Maximum expensing amount under Sec. 179 will be $125,000.

72. Investment-based phaseout amount will be $500,000

73. For 2010 and 2011, the figures are $500,000/$2.0 million.

74. Sec 179 maximum expensing amount was scheduled to drop to $25,000 and have investment-based phaseout of $200,000 after 2011.Off the shelf computer software will qualify for Sec. 179 expensing election if placed in service in a tax year beginning before January 1, 2013.Notes

75. 14Estate Tax HistoryIn 2001, Congress passed Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) with a 10-year sunset provision to overcome filibuster. Over next ten years, federal tax exemption rose from $675,000 in 2001 to $3.5 million in 2009. The tax rate dropped from 55% in 2001 to 45% in 2009.Generational skipping tax (GST) mirrors federal estate tax exemption.A number of states have either de-couple of federal estate tax regime or eliminate state estate taxes.EGTRRA maintained a gift tax rate of 35% over entire 10-year period. De-unified Gift Tax credit providing on a $1.0 million life time exclusion.In 2010, EGTRRA eliminated the federal estate tax and abolished stepped-up basis in transfers to beneficiaries upon death.In 2011, EGTRRA’s sunset provisions were set to disappear and federal estate tax would return.Tax Relief Act changes all of that.Notes

76. 15Estate Tax ProvisionsPrior to Tax Relief act, estate tax exemption levels were scheduled to decreaseScheduled for 2011: Federal exemption level would drop from 2009 level of $3.5 million to $1.0 million.

77. Tax Relief Act Results: Federal estate tax exemption, gift tax exemption and GST level rises to $5.0 and indexed for inflation.

78. Duration: For anyone dying on January 1, 2011 to December 31, 2012.Federal estate tax rateScheduled for 2011: Tax rate for estate tax and GST rises to 55% on estate in excess of $1.0 million

79. Tax Relief Act Results: Estate tax rate and GST with a top rate of 35% on excess of $5.0 million (but that isn’t all – portability.)

80. Duration: For anyone dying on January 1, 2011 to December 31, 2012.

81. Portability: Legislation allows for portability of $5.0 million estate tax exclusion for married couples i.e. couples can use unused portion of predeceased spouse to shield up to $10.0 million from estate tax.

82. Issue: only get the unused exemption of last predeceased spouse.Notes

83. 16Gift Tax ProvisionsGift Tax levels were re-unified with estate tax exemption levels.In 2010, gift top tax rate was 35% with maximum exclusion amount of $1.0 million. Only use exclusion when you gave in excess of annual exclusion which is $13,000 for 2009-2011.

84. Tax Relief Act changes that.

85. Top Rate of 35% and a $5 million exclusion. Annual exclusion remains the same.

86. Duration: through December 31, 2012GST applies at the same exemption and rate level as federal estate tax.2011 and 2012 it will be 35% tax rateNotes

87. 17What about George?To deal with highly publicized estates of wealthy individuals who died in 2010 Congress created a two approaches:No estate tax, with modified carryover basis for inherited assets – the EGTRRA 2010 rulesThe estate tax in effect of 2011, with step-up basis for inherited assets.Provides an extension to everyone to make decision.In 2010, get to pick which option works for estate.George Steinbrenner’s estate would pick first alternative because tax would only be due on sale of Yankees.

88. Some one with little capital gains would choose option two.Who decides: generally left up to personal representativeNotes

89. 18Determination of Taxable Estate for Estate Tax PurposesTaxable Estate = Gross Estate – Deductions/Exclusions + Taxable Gifts - CreditsGross Estate is comprised of all assets owned by a person including:Probate Assets – real property, stocks, bonds, mortgages + notes owed to you, cash, miscellaneous property, and insurance with estate listed as beneficiary.

90. Non-Probate Assets – life insurance (decedent demonstrated incidents of ownership), property owed in joint tenancy with rights of survivorship, paid on death accounts, annuities, IRA’s, 401K’s, and pension plans.

91. General Powers of Appointment Assets – property decedent held with a power of appointment to appoint decedent, creditors or estate as beneficiary.

92. Special Lifetime Transfers – gifts given within 3 years of death, retained life estate, effective at death, revocable.

93. Q-Tip Property – assets transferred to surviving spouse and passed to another beneficiary under the provisions of non-surviving spouses will.Notes

94. 19Deductions, Exclusions, Gifts and CreditsDeductions/Exclusions are either Ordinary or SpecialOrdinary Deductions include:Funeral expenses, administration of estate expenses, debts of estate and mortgages owed by decedent.Special Deductions include:Marital deduction – decedent can transfer all assets to qualified spouse at death tax free. But will be taxed at death of surviving spouse.

95. Charitable deduction – unlimited deduction for transfers to charitable deductions.Gifts in excess of annual exclusion (13K in 2010) use up $1.0 million lifetime exclusion and then all gifts above that amount are part of estate and taxed.Credits occur from the payment of gift taxes, foreign death taxes paid, taxes paid on prior transfers.Notes

96. 20Additional Estate Tax InformationThe three local jurisdictions have different state estate tax regimes.Virginia – Probate fees only.No estate tax for decedent’s dying after July 1, 2007. Probate fees associated with size of estate. Generally, $100 per $100,000 on estates valued at more than $15,000.Washington, DC – probate fees and estate tax.Has a $1.0 million exemption level before tax applies.

97. Has graduated rate that can reach as high as 16%.

98. Probate costs are graduated but are approximately ten cents per $100 on estates valued at more than $500.Maryland – probate fees, estate tax and inheritance tax.Has a $1.0 million exemption level with automatic 16% tax rate above exemption level

99. Inheritance tax - a tax imposed on the “privilege” of receiving property from a decedent's estate. Generally, imposes 10% tax on non-lineal inheriting beneficiaries.

100. Probate costs are graduated but are approximately ten cents per $100.Notes

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