This article will cover three tax issues that are of concern during 2010, or could affect 2009 income tax returns filed in 2010. The first topic deals with the Make Work Pay Credit. The second topic will discuss the effect of capital gains taxes on sales in 2010 and subsequent years. Finally, I will briefly discuss income tax issues that may arise on property inherited from a person who died in 2010.
The Making Work Pay Credit was enacted for 2009 as a part of the stimulus package passed by Congress in order to help alleviate the effect of the current recession. One of the obvious problems with any income tax credit is that it does not have an effect until income tax returns are filed for the year in which the credit is allowed. In order to alleviate this concern, Congress directed the Internal Revenue Service to modify the income tax withholding tables to take into account the Making Work Pay Credit. Since March of 2009, all employers have been withholding less income tax from employees’ pay than they did previously.
The Making Work Pay Credit applies both to tax years 2009 and 2010. The maximum credit is $800 for an eligible couple with earned income of $12,932 or more, or $400 for an individual taxpayer with earned income of $6,451 or more. The Making Work Pay Credit will apply even if the only earned income is net income from farming.
One of the problems with the Making Work Pay Credit is that too little income tax was withheld for many individuals. This will particularly be true for families where both the husband and wife are employed or where an individual had two or more sources of wage income during the tax year.
You must claim the Making Work Pay Credit on your income tax return even though you may have already received the benefit of the credit through reduced income tax withholding.
The amount of the Making Work Pay Credit is reduced by the $250 economic recovery payment made to recipients of Social Security, Supplemental Security Income (SSI), railroad retirement, veteran’s disability compensation or pension benefits, as well as any credit for government retirees allowed to the taxpayers. This reduction in the Making Work Pay Credit is another issue that was not contemplated by the withholding tables and any individual who received the $250 supplemental payment and has earned income will probably owe additional income tax for 2009.
The Making Work Pay Credit is phased out for individuals with adjusted gross income above $75,000 ($150,000 for joint returns).
In 2001, Congress enacted what have subsequently become called the “Bush tax cuts.” Under the rules of the United States Senate, permanent tax legislation could not be enacted without having 60 votes. There were not 60 votes available to approve the Bush tax cuts. Therefore, the Bush tax cuts were passed with a 10-year sunset provision. 2010 is the 10th year.
One of the of Bush tax cuts was a reduction in the maximum capital gains rate from 28 percent to 15 percent. Because of the Bush tax cuts, a maximum federal tax of 15 percent is imposed on the adjusted net capital gain of a taxpayer.
At this point, it looks as though Congress will not extend the Bush tax cuts beyond 2010. Therefore, effective Jan. 1, 2011, the maximum capital gains rate will increase from 15 percent to 28 percent.
The maximum tax rate is of primary concern to an individual contemplating a sale of part or all of their farm real estate. Anyone contemplating such a sale would be wise to make the sale in 2010 rather than in 2011 or thereafter. This maximum tax rate only applies to long-term capital gains rates; it will not apply to sales of depreciable property or sales of ordinary income property such as crops or raised livestock.
Another one of the Bush tax cuts repealed the estate tax for decedents dying in 2010. To counter-balance the repeal of the estate tax, Congress eliminated the stepped-up basis adjustment. Prior to 2010, inherited assets received a new income tax basis equal to the value of the asset on the date of death. Because the stepped-up basis adjustment has been eliminated, property that is inherited from a person who dies in 2010, will have the same income tax basis as the property had in the hands of the decedent. This will require anyone who inherits property to make a determination of the income tax basis of the property.
Congress provided for a basis adjustment of up to $1.3 million to be allocated among the decedent’s assets by the executor. For this purpose, the term “executor” is broader than the normal concept and applies to anyone who is treated as an “executor” under federal tax law. This will be the duly appointed personal representative or executor of a probate estate, or if there is no probate estate, it may be anyone handling the decedent’s assets such as a trustee or even a joint owner. The executor must file a specific return in order to make the basis adjustment elections. In addition to the general basis adjustment of $1.3 million, there is an additional basis adjustment election available to property that is transferred to a spouse directly or indirectly through some types of trusts. That additional basis adjustment may be up to an additional $3 million.
The basis adjustment rules are in effect only for 2010. Once the Bush tax cuts expire at the end of 2010, the prior law is reinstated. Decedents dying after 2010 will have a basis in the inherited assets equal to the fair market value of the asset as of the date of death.
There is an old saying that the only things that are certain are death and taxes. The one certainty about taxes is that the tax law will change.
James F. McLeod is with Lathrop & Gage LLP, in Springfield, Mo.
