2011 Changes for Individuals and Businesses

INDIVIDUAL TAXPAYERS

  • For 2011, the personal exemption amount is $3,650 ($3,800 for 2012).
  • The tax rates on individuals' income remain at 10%, 15%, 25%, 28%, 33% and 35% for 2011 and 2011.
  • The IRS has issued final regulations explaining the complex basis and character reporting requirements that apply for most stock acquired after 2010, for shares in a regulated investment company (i.e., a mutual fund) or stock acquired in connection with a dividend reinvestment plan after 2011, and for other specified securities acquired after 2012. In brief, brokers will have to report to the IRS the customer's adjusted basis (cost for tax purposes) in the security and whether any gain or loss is short or long-term. When these rules are fully implemented, the IRS will be in a much better position to monitor whether taxpayers are properly reporting investment gains and losses.
  • Qualified dividend income will continue through 2012 to be taxed to shareholders at the favorable rates that apply to net capital gain.
  • The standard mileage rate for business travel is 51¢ for the first half of 2011 and 55.5¢ for the second half.
  • Mileage rate for use of a car for qualified medical transportation is 19¢ per mile for the first half of 2011 and 23.5¢ for the second half.
  • The election to deduct state and local general sales and use taxes, instead of state and local income taxes, is extended to tax years beginning before 2012.
  • IRS allows certain real estate professionals to make a late election to treat all rental real estate interests as a single activity for PAL rules.
  • 50% first-year bonus depreciation is extended to apply to property placed in service before 2013 (before 2014 for certain long-production-period property and aircraft).
  • Code Sec. 179 expensing limit is $139,000, and the investment-based phase-out level for expensing is $560,000 for tax years beginning in 2012.
  • The above-the-line deduction for qualified tuition and related expenses is retroactively reinstated and extended through 2011.
  • Individuals can deduct a maximum of $2,500 annually for interest paid on qualified higher education loans through 2012. Phase-out ranges are provided.
  • A maximum of $250 above-the-line deduction is available for expenses of elementary and secondary school teachers through 2011.
  • The 15% capital gain rate is extended through 2012.
  • For 2011, the dollar thresholds for the optional methods of computing net earnings from self-employment are $4,480 and $6,720; for 2012, they are $4,520 and $6,780.
  • The individual AMT exemption amounts for tax years beginning in 2011 increase to $48,450 for unmarried individuals, $74,450 for married individuals filing jointly, and $37,225 for married individuals filing separately.

PENSIONS

  • The 2011, the limit on 401(k) plan elective deferrals is $16,500 ($17,000 for 2012).
  • The 2011, compensation for “highly compensated employee” status is $110,000 ($115,000 for 2012).
  • The 2011, the limit on annual additions to a defined compensation plan is $49,000 ($50,000 for 2012).
  • The 2011, the maximum annual benefit from a defined benefit plan is $195,000 ($200,000 for 2012).

ESTATES AND GIFTING
  • The estate tax is retroactively reinstated for 2010 with an applicable exclusion of $5 million, and a maximum tax rate of 35%.
  • The applicable exclusion amount of $5 million is adjusted for inflation after 2011.
  • The surviving spouse of a decedent who died after 2010 may be able to use the unused part of the deceased spouse's exclusion amount.
  • The gift and estate tax are reunified for gifts made after 2010 and an overall $5 million exemption applies.
  • Annual per-donee gift tax exclusion is $13,000 for 2010, 2011, and 2012.


IMPORTANT PROVISIONS EXPIRING AT THE END OF 2011

  • Deduction of state and local general sales tax
  • Above the line deduction for qualified tuition and related expenses
  • Above the line deduction of $250 for classroom expenses for teachers
  • Tax free distributions from IRA's up to $100,000 for charitable purposes


IMPORTANT PROVISIONS EXPIRING AT THE END OF 2012

  • Reversion of individual tax rates to 2001 levels
  • Favorable tax rate on capital gains income
  • Marriage penalty relief

HEALTH CARE

The massive Healthcare overhaul contains a host of tax changes, many of which are both complex and novel. To compound the challenge, the tax changes go into effect over an unusually long number of years.

Some important tax changes in the health care overhaul legislation that are effective before 2013 and from 2013 through 2018 are reflected below.


TAX CHANGES TAKING EFFECT IN 2013

Increased HI tax for high-earning workers and self-employed taxpayers

Effective for tax years beginning after 2012, an additional 0.9% hospital insurance (HI) tax applies to wages received with respect to employment in excess of: $250,000 for joint returns; $125,000 for married taxpayers filing a separate return; and $200,000 in all other cases. The additional 0.9% HI tax also applies to self-employment income for the tax year in excess of the above figures.

Surtax on unearned income of higher-income individuals

Beginning with tax years after Dec. 31, 2012, an unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. For an individual, the tax is 3.8% of the lesser of either (1) net investment income or (2) the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). For surtax purposes, gross income doesn't include excluded items, such as interest on tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a principal residence.

Higher threshold for deducting medical expenses

Starting with tax years after Dec. 31, 2012, unreimbursed medical expenses will be deductible by taxpayers under age 65 only to the extent they exceed 10% of adjusted gross income (AGI) for the tax year. If the taxpayer or his or her spouse has reached age 65 before the close of the tax year, a 7.5% floor applies through 2016 and a 10% floor applies for tax years ending after Dec. 31, 2016.

Dollar cap on contributions to health FSAs

Commencing with tax years after Dec. 31, 2012, for a health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year (or other 12-month coverage period) can't exceed $2,500.

Deduction eliminated for retiree drug coverage

Sponsors of qualified retiree prescription drug plans are eligible for subsidy payments from the Secretary of Health and Human Services (HHS) for a portion of each qualified covered retiree's gross covered prescription drug costs (“qualified retiree prescription drug plan subsidy”). These qualified retiree prescription drug plan subsidies are excludable from the taxpayer's (plan sponsor's) gross income for regular income tax and alternative minimum tax (AMT) purposes. For tax years beginning before 2013, a taxpayer may claim a business deduction for covered retiree prescription drug expenses, even though it excludes qualified retiree prescription drug plan subsidies allocable to those expenses. However, for tax years beginning after Dec. 31, 2012, the amount otherwise allowable as a deduction for retiree prescription drug expenses will be reduced by the amount of the excludable subsidy payments received.

Fee on health plans

Effective each policy year ending after Sept. 30, 2012, each specified health insurance policy and each applicable self-insured health plan will have to pay a fee equal to the product of $2 ($1 for policy years ending during 2013) multiplied by the average number of lives covered under the policy. The issuer of the health insurance policy or the self-insured health plan sponsor is liable for and must pay the fee.

$500,000 compensation deduction limit for health insurance issuers

Commencing with tax years beginning after Dec. 31, 2012, for services performed during that year, a covered health insurance provider isn't allowed a compensation deduction for an “applicable individual” (officers, employees, directors, and other workers or service providers such as consultants) in excess of $500,000. A complex rule may reach compensation attributable to services performed in a tax year beginning after Dec. 31, 2009.

Excise tax on medical device manufacturers

Effective on sales after Dec. 31, 2012, a 2.3% excise tax applies under Code Sec. 4191 to sales of taxable medical devices intended for humans. The excise tax, paid by the manufacturer, producer, or importer of the device, won't apply to eyeglasses, contact lenses, hearing aids, and any other medical device determined by IRS to be of a type that is generally purchased by the general public at retail for individual use.

In addition, there will be many more tax changes related to health care taking effect in 2014. If you have questions, please do not hesitate to contact our office.