Tax changes for 2010

As I write, Massachusetts is sending a Republican Senator to Washington, D.C. for the first time since Edward Brooke served from 1967–1979. What’s this got to do with tax-law changes? A lot! Without making any political commentary, the facts are:

• U.S. Senator Scott Brown is considered a real threat to President Obama’s health care reform bill. He says on his Web site, “I believe that all Americans deserve health care coverage, but I am opposed to the health care legislation that is under consideration in Congress and will vote against it.”

• If the proposed health care reform legislation is enacted, there are significant tax increases that would impact most dentists.

We don’t know how, or whether, the Massachusetts election will affect the outcome, but it is probably safe to say the debate will go on for a while longer. And this creates an uncertain environment for tax code in 2010 and beyond.

Uncertain times

Remember that ancient proverb, “May you live in interesting times?” When it comes to U.S. tax codes, 2010–2011 is one of those “interesting” periods in which the old becomes new again, and the new is hauntingly familiar.

You would think tax law changes enacted well into a calendar year would only affect future years. But since 1917, Congress has passed 14 laws with retroactive tax increases.

We don’t know what Congress will do in the coming months or how it might affect our 2010 taxes, but one thing is virtually certain: Your taxes are going up in 2011. This is because the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) is coming to an end this year. This law had brought sweeping changes to the tax code:

• It lowered the top income tax bracket of 39.6 % to 35 % as well as lowering all the other brackets.

• It introduced dozens of tax cuts that were phased in over the 10-year period.

Now, just as we got used to the changes, EGTRRA is expiring. The law was designed for this limited 10-year period, after which everything reverts to the way it was in 2001. This year (2010) is the last year for EGTRRA, so it will give us the lowest taxes in the 10-year window as well as for several years prior. While we have had numerous tax bills since 2001, including Bush and Obama stimulus packages, starting in 2011, most of the tax law in effect in 2001 is reborn.

First, the good news

Let’s begin with 2010 tax considerations that can play in our favor.

• Phase-Outs: In 2010 we are no longer subject to certain “phase-outs” or take-aways that increase our taxes. They have come down gradually since 2001 and include limiting or taking away our personal exemptions ($3,650 per eligible dependent in 2010) and itemized deductions by limiting them to amounts above 3% of Adjusted Gross Income.

• Estate Taxes/Gifts: Unless Congress enacts retroactive changes, there is no estate tax in 2010, and you may gift up to $13,000 to any individual without filing a gift tax return.

• Depreciation/Expensing: While Section 179 expensing has dropped from its 2009 amount of $250,000, we still have a healthy $134,000 in 2010.

• IRA/Roth IRA Conversions: For more on this opportunity, see DPR January 2010.

• Social Security Wage Base (SSWB): For the year 2010, the SSWB is unchanged at $106,800. The SSWB has risen every year since 2000, 3.45% per year on average, so it’s refreshing to see no change this year. As in 2009, we continue to pay 6.2 % of wages up to the wage base ($6,621.60) or 12.4 % for independent contractors and self-employed dentists ($13,243.20).

• Retirement Planning: In 2010 the contribution limits for 401(k) and similar plans like 403(b)s are unchanged. You may defer $16,500 of wages into these plans ($22,000 if you are older than 50).

The not-so-good news

• Mileage deduction rates go down: Business miles are deductible at 50 cents per mile (down from 55 cents in 2009); Charitable miles are deductible at 14 cents per mile (unchanged); If you are on the road to recovery, medical travel is deductible at 16.5 cents per mile (down from 24 cents in 2009).

• Bonus depreciation goes away: Bonus depreciation of 50% of qualified business expenditures expired at the end of 2009.

• Non-itemized real-estate tax deductions: In 2009, homeowners who did not itemize deductions were able to deduct their real estate taxes in addition to their standard deduction. They could deduct up to $500 (or up to $1,000 if married filing jointly). This primarily benefited taxpayers who had paid off their mortgage but still paid property tax on their home. This is gone in 2010.

• College tuition deductions: The deduction for up to $4,000 of college tuition and fees expired after 2009.

• IRA charitable donations: Beginning in 2010, IRA owners aged 70 ½ will lose the opportunity to directly donate part of their IRA to charity.

• Child tax credit: The child tax credit of $1,000 reverts to $500 after 2010.

• Long-term capital gains rates: The tax rate reduction for long-term capital gains and dividends is scheduled to expire in 2010. In 2011, the maximum long-term capital gains tax rate reverts to 20% from 15%.

• AMT exemptions: We were given some relief from the Alternative Minimum Tax in 2009 with a temporary patch that set AMT exemption amounts at $70,950 for married filing jointly; $46,700 for single and head-of-household; and $35,475 for married filing separate. We are uncertain about 2010.

Stay informed, stay in touch

Now, more than ever, your CPA/financial advisor should be your best friend, even if he or she must sometimes be the bearer of bad news. With all the changes in 2009 and depending on the planning and tax-savings opportunities you’ve engaged in so far, you may be happily or unhappily surprised by what you discover upon completion of your tax returns. Either way, carpe diem on future planning. Just as you would prefer seeing your patients regularly for preventive care well before more invasive treatment becomes necessary, your CPA/financial advisor can be of best use to you if you are in regular touch.

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