2011 Tax Update

In 2001 and 2003, Congress implemented several tax cuts for individuals, families, and small businesses. However, many of these tax cuts will expire on January 1, 2011. As a result, Americans will be faced with the largest tax increase in history. Although proposals have been made to extend certain of these tax benefits, no tax laws have been passed to prevent these tax increases. Several of the expiring provisions are listed below:

Personal income tax rates will rise with the lowest rate rising from 10 to 15 percent and the highest rate rising from 35 to 39.6 percent.
Personal exemptions will phase-out out for higher-income earners. The personal exemption deduction for 2011 is expected to be $3,650, which will be limited with a phase-out beginning at $252,000 of adjusting gross income (AGI) for joint filers and $168,000 for single filers.
Itemized deductions will phase-out for higher-income earners with up to 80 percent of deductions being eliminated.
The child tax credit will be decrease from $1,000 to $500.
The adoption credit will only be available if the adopted child has special needs.
Standard deductions for married filers will no longer double that of unmarried filers.
Capital gains tax rates will increase from 15 to 20 percent.
Dividends will no longer receive long-term capital gains rate but will be taxed at ordinary rates of up to 39.6 percent.
The deduction for tuition and fees for secondary education will phase-out to a maximum of $2,000 if AGI is greater than $130,000 for joint filers and $65,000 for single filers.
Student loan interest deductions will phase-out, with a limit on the number of months that interest payments are deductible.
The Lifetime Learning credit for secondary education will be limited with a phase-out beginning at $96,000 of AGI for married filers and $48,000 for single filers.
The American Opportunity credit for secondary education will be limited with a phase-out beginning at $160,000 of adjusted gross income for married filers and $80,000 for single filers.
Teachers will no longer be able to deduct classroom expenses.
50 percent bonus depreciation for small businesses will expire.
Research and experimentation tax credits will expire.
Alternative minimum tax will impact more Americans.

Now that Congress has passed a landmark health care reform package, much work needs to be done in dealing with new requirements. While the end result of the legislative process is necessarily health care related, the tax law plays a major role in its implementation. From the tax credits and subsidies used to expand health coverage, to the many penalties, fees and surtaxes designed to pay for it, the Tax Code is front and center.

Two new laws. Health care reform is actually made up of two new laws: the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010. The Patient Protection Act was crafted largely in the Senate and sets out the general framework of health care reform. The Reconciliation Act was prepared in the House to modify the Patient Protection Act, especially in the areas of tax credits and cost sharing for individuals to help make coverage more affordable. Common features to both laws are delayed effective dates for many of the provisions, which make strategic planning all that more important.

New taxes and penalties. Viewing the historic health care reform package from the context of the Tax Code, many new taxes and penalties stand out immediately above the rest. Initially, we would advise taking particular note of the following highlights:

Individuals who earn more than $200,000 for the year ($250,000 for married couples) will pay an additional 0.9 percent in Hospital Insurance (Medicare) tax, starting in 2013;
Individuals whose adjusted gross income for the year exceeds $200,000 ($250,000 for joint filers), whether from wages or otherwise, will also pay an additional 3.8 percent Medicare tax on net investment income, starting in 2013;
Employers with 50 or more employees that do not offer medical insurance coverage or offer coverage that does not meet new minimum essential coverage requirements will pay a penalty per employee, starting in 2014;
Small for-profit employers with no more than 25 employees are entitled to up to a 35 percent tax credit on the cost of providing health insurance for employees, starting immediately in 2010 (small tax-exempt employers may qualify for a reduced credit);
Dependent children up to age 26 may remain on their parents' health insurance plans; self-employed individuals are allowed a deduction for the premiums paid on such dependent coverage.
Most individuals will be required to obtain health insurance or be subject to a penalty tax starting in 2014;
Health flexible savings arrangement (FSA) dollars will be limited to prescription medications with some exceptions after 2010, along with a $2,500 annual cap on expenses covered under health FSAs, after 2012;
A 40 percent excise tax will be imposed on high-cost, "Cadillac" employer-sponsored health coverage, starting in 2018;
Fees will be imposed on the pharmaceutical industry and health insurance providers , starting in 2011 and 2014, respectively;
An excise tax will be imposed on medical device manufacturers after 2012; and
Limits on tax-subsidized medical expenses will be imposed by raising the itemized medical expense deduction floor for regular tax purposes from 7.5 percent to 10 percent, generally starting in 2013.

Exchanges. The health care reform package requires each state to establish an insurance exchange by 2014 to help individuals and qualified employers obtain coverage. Coverage will be offered at various levels. Qualified individuals may be eligible for premium assistance tax credits, cost-sharing or vouchers to help pay for coverage through an insurance exchange. An individual's income, whether or not coverage is provided by his or her employer, will be taken into account when determining if the individual qualifies for a premium assistance tax credit, cost-sharing or voucher.

IRS guidance. Over the course of the next months and years, the IRS and other federal agencies will be filling in details on how to comply with all the provisions under the massive health care reform package and the expiring tax provisions. Our office will be analyzing these developments, with an eye toward how to best maximize results under the new law for our clients. Please do not hesitate to contact us to discuss these many provisions and how they may affect you or your business.