Recent Tax Legislation

• No estate tax: For decedents dying after December 31, 2009, the estate tax is repealed. With this repeal, the stepped-up basis at-death transfer rule is also eliminated. However, this rule is alleviated somewhat with special elective step-up rules. Congress and the Whitehouse are promising to re-enact some version of the estate tax before the end of 2010, and making it retroactive to January 1, 2010.

• Roth IRA conversions: Regardless of income, taxpayers can convert traditional IRA accounts to Roth IRA accounts. Previously, taxpayers with modified adjusted gross income over $100,000 could not make the conversion. Also, married persons filing separate returns are now eligible to make the conversion. Note that the converted amounts are includible in taxable income, however, for conversions taking place in 2010, a taxpayer can elect to ratably include the amount over two years in 2011 and 2012.

• Recapture of first-time homebuyer credit: For first-time homebuyers who purchased a principal residence before Jan. 1, 2009, and took the then-$7,500 credit, 2010 marks the first year of recapture, in what amounts to a $500 repayment.

• Phaseouts of itemized deductions and personal exemptions: The overall limitation on itemized deductions for taxpayers with AGIs above a threshold amount does not apply. The phaseout for personal exemptions for higher income taxpayers also does not apply.

• Education credit: The American Opportunity Credit replaced the Hope Education Credit for 2009 and 2010 only. The benefits of the new credit are: (1) required course materials, such as books qualify; (2) the credit is increased to up to $2,500; (3) income level phasesouts are higher; (4) forty percent of the credit is refundable.

• Nonbusiness energy property credit: A 30% credit (up to $1,500, less if any credit was taken in 2009) is available if you make certain energy efficient improvements to your home. Such improvements include high-efficiency heating and air conditioning systems, water heaters, windows, skylights, doors, insulation and roofs. The improvements must be made to an existing principal residence. A manufacturer's certificate must accompany the qualifying property.

• Residential energy efficient property credit: Taxpayers receive a 30% credit for installing solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. The property can be purchased for both an existing principal residence and for new construction. A manufacturer's certificate must accompany the qualifying property.

• First-time homebuyer credit: First-time homebuyers (including long-term residents) are eligible for the tax credit if the purchase contract is entered into before May 1, 2010, and closing takes place before July 1, 2010. These dates are extended by one year for members of the military on extended active duty.

• Lower capital gains rates: The 15% capital gains rate (0% for taxpayers below the 15% tax bracket) will increase to 20% in 2011. Qualifying dividends taxed at reduced capital gains rates will be taxed at ordinary income rates beginning in 2011.

• Increased first-year asset expensing: For 2010, the amount eligible for asset expensing is $134,000. Beginning in 2011, the amount is reduced to $25,000 (indexed for inflation).

• Expanded NOL carrybacks: Businesses may carryback NOLs for up to five years for losses incurred in taxable years beginning after Dec. 31, 2007, and beginning before Jan. 1, 2010, but can only elect for one taxable year, not two. Businesses are able to offset 50% of the available income from the fifth taxable year preceding the loss, and 100% of all income in the remaining four carryback years.

• Refundable portion of child tax credit: The earned income formula for the determination of the refundable child credit applies to 15% of the taxpayer's earned income in excess of $3,000. This allows more earned income to qualify in order to determine how much of the credit is refundable. Beginning in 2011, the amount will be considerably higher.

• Higher earned income tax credit: The temporary increase in the EITC percentage from 40% to 45% for families with three or more qualifying children ends in 2010. Additionally, the marriage penalty relief, through an increased threshold phaseout amount for married couples filing joint returns, expires.

• Lower income tax rates: Legislation in 2001, reduced the tax rates on ordinary income through 2010. The current rates of 10%, 15%, 25%, 28%, 33%, and 35% could all change beginning in 2011.

• Child tax credit dollar amount: The $1,000 per qualifying child credit amount is set to be reduced to $500 beginning in 2011.

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