With the recent demise of the President’s Health Care Bill, the proposed income taxes that were to pay for the increase in health care costs have not been enacted. However, as both parties agree that health care legislation is needed, when health care legislation is passed at a future date, it is likely that the proposed income taxes that we will discuss will be enacted, as other measures have already been discussed and discarded.
2010 TAX LAW CHANGES
The foreign earned income exclusion will increase to $91,500.
If you are married and both spouses work each is entitled to a separate $91,500 exclusion. However, the exclusions can not be combined. If one spouse earns $120,000 and the other $50,000, the maximum exclusion to be claimed on the tax return is $91,500 and $50,000 or $141,500 in total.
There has been no change in the maximum that can be claimed for the foreign housing exclusion in 2010. The maximum housing expense that can be deducted is $90,000. The actual housing costs are reduced by a base amount to arrive at the allowed housing exclusion. In the example that follows we have assumed the maximum housing cost of $90,000. The base amount for 2010 is now $14,640. Hence the maximum housing exclusion for 2010 will be $75,360.
Housing cost $90,000
Less: base amount - 14,640
Housing exclusion $75,360
The standard deduction in 2010 will be:
Single taxpayers $ 5,700
Married filing joint taxpayers $11,400
The personal exemption in 2010 will be $3,650
A long standing myth in Bermuda is that if you earn less than the foreign earned income exclusion you do not have to file a US tax return. The reality is that if you want to claim the foreign earned income exclusion you must file a return and “elect” the exclusion. Failure to “elect” the exclusion within one year of the original filing date of the return could preclude you from claiming the benefits of the exclusion.
Who must file a U.S. individual income tax return?
Single taxpayers with income over $ 9,350
Married filing joint taxpayers with income over $18,700
Estate Taxes
A major 2010 tax law change is the repeal of the estate tax.
The estate tax has been replaced with a capital gains tax on appreciated assets. The executor can allocate $1,300,000 of basis increase to any property and $3,000,000 in basis increase can be allocated to a surviving spouse. Inherited assets will have the same cost basis in the property as the decedent. Most state estate tax laws will continue to apply.
It is currently uncertain if Congress will attempt to pass retroactive legislation in 2010 to reinstate the estate tax.
In 2011 the estate tax law will be reinstated as it was in 2001.
The $1,000,000 exemption will be reinstated (the 2009 exemption was $3,500,000) as will a top tax rate of 55% plus a 5% surcharge on estates from $10,000,000 to $17,000,000 (the top tax rate in 2009 was 45%).
Medicare Part B Premium
The current monthly premium is $96.40. However, for single taxpayers with income over $214,000 and married taxpayers with income over $428,000 the monthly premium will increase to $353.60.
Social Security
There will be no cost of living hike for social security beneficiaries in 2010. The social security wage base of $106,800 will stay the same, the social security tax rate will remain at 6.2%, and the medicare tax rate will remain at 1.45% on all earned income. Self employed taxpayers will continue to pay 15.3% on the first $106,800 of earned income and 2.9% on amounts above that.
Converting Ira’s to Roth Ira’s in 2010
The income limitation has been done away with. Before converting, you should consider if you will be in the same or a higher tax bracket on retirement. Also be aware that removing funds from your IRA is a taxable event. 50% of the income will be reported on your 2011 and 2012 return respectively. However, you can elect to pay the tax on your 2010 return. As it is likely that the 2011 and 2012 tax rates will be higher, this election should be considered. If you do not have the cash to pay the tax, reconsider converting
Projected 2011 Tax Law Changes
If adjusted gross income exceeds $170,000, itemized deductions will likely be reduced by 3% of the amount above $170,000.
If adjusted gross income exceeds $170,000 for single and $255,000 for married, personal exemptions will likely be reduced by 2% for each $2,500 of income over these amounts
Proposed legislation may limit the tax benefit of itemized deductions to 28% if the individual is in a higher tax bracket
Health Care Proposed Excise Tax
If your employer provides you with health care and the premium exceeds:
Single $8,900
Married $24,000
The individual will be required to pay a 40% excise tax on the difference between the actual cost and the above amount. For example, if the premium for the single individual was $18,900 the taxpayer would owe $4,000 in excise tax ($18,900 less $8,900=$10,000 x 40%).
Health Care Proposed Tax Surcharge
If your income exceeds:
Single $500,000
Married $1,000,000
You will pay a 5.4% tax surcharge. With the top tax rate in 2011 expected to be 39.6%, this will increase the top tax rate to 45%.
If your income exceeds:
Single $200,000
Married $250,000
You will likely pay a 9/10 of 1% tax surcharge.
Health Care Proposed Social Security Surcharge
If your income exceeds:
Single $175,000
Married $225,000
You will likely pay a 6.2% social security tax on all earned income above these amounts.
Self employed individuals will pay a 15.3% social security tax on all earned income above these amounts.
Health Care Insurance
Under the proposed legislation everyone must have a U.S. health insurance policy. Failure to do so will result in the individual paying an estimated penalty of $1,900 or 2.5% of your income. If the individual fails to declare and pay this penalty when they file their tax return they are subject to a fine of $250,000 and/or 10 years in jail.
How High Can Taxes Go?
Assume a widowed physician age 60 practicing in New Jersey earning $500,000+ a year
Current Tax Bracket
Federal 35.00%
New Jersey 10.75%
Medicare tax 2.90%
Total 48.65%
Proposed Tax Bracket
Federal 39.60%
Health care surcharge 5.40%
New Jersey 10.75%
Medicare tax 2.90%
Social Security tax 12.40%
Total 71.05%
The disallowance and restrictions on itemized deductions and personal exemptions could add an additional 4.5% to this total
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