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Major Tax Savings Available Through 2012
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Two major tax bills signed by the President in September and December 2010 provide for significant tax savings for individuals, farms and commercial businesses though 2012.


Source: GreenStone FCS Dollars and Sense Column in Michigan Farm News

Major Tax Savings Available Through 2012

Two major tax bills signed by the President in September and December 2010 provide for significant tax savings for individuals, farms and commercial businesses though 2012. Several of the major tax breaks are retroactive to January 1, 2010. This comes at a good time for cash-crop farmers since strong commodity prices are creating good profits. Lets review some of the major provisions of the recent tax bills.

Enhanced Depreciation Expense

The Sec. 179 deduction, which allows a direct write-off of qualifying capital purchases, is increased to $500,000 for 2010 and 2011. The Sec. 179 deduction is phased-out dollar for dollar when qualifying capital purchases exceed $2,000,000 and is completely eliminated when qualifying capital purchases exceed $2,500,000. In 2012 this valuable deduction is reduced to $125,000 with the phase-out starting at $500,000.

The September tax bill reinstated 50% bonus depreciation expense on qualifying capital purchases for 2010. The December tax bill increased bonus depreciation to 100% for qualifying assets acquired after September 8, 2010 through December 31, 2011. Evidently, taxpayers can take either the 50% or 100% bonus depreciation on qualifying asset purchases during that time period. The bonus depreciation rate is limited to 50% for 2012 purchases and is scheduled to terminate in 2013. Bonus depreciation is available without phase-out for purchases of NEW assets with a depreciable life of 20-years or less, which includes most farm assets. The December bill also assigns a 5-year depreciable life to new farm machinery acquired in 2010 and 2011.

Bush-Era Tax Cuts Extended

The December tax bill extended the Bush-Era tax cuts for 2011 and 2012. The two-year extension will retain the lower individual tax rates on ordinary income and the favorable long-term capital gains tax rates of 0% and 15%, which is very beneficial to farms with raised breeding livestock and also taxes most domestic dividends using the 0% and 15% rates. The December bill extended through 2012 extends the repeal of the itemized deduction and personal exemption phase-outs, which high-income taxpayers faced. The popular $1,000 child tax credit, increased earned income credits for lower-income taxpayers, increased education credits, and marriage penalty relief are also extended through 2012.

Other Provisions

Self-employed individuals are allowed to deduct health insurance premiums to the extent of self-employment income as an adjustment to income, which reduces income tax but not self-employment tax. For 2010 only, self-employed taxpayers are also allowed to reduce their self-employment income by their deductible health insurance premiums. For 2011, the social security tax rate on employees is reduced by 2% and the self-employment tax rate is also reduced by 2%.

Summary

The December bill alone is estimated to save $1,890 in taxes for an employee earning $50,000 per year. Business owners could see a much higher rate of tax savings. However, the new tax laws are comprehensive and complex. The IRS recently announced that taxpayers using itemized deductions will not be able to file their tax returns until sometime after mid-February because of the recent new tax laws. To ensure you take advantage of all of the new tax breaks, use a highly qualified tax preparer to complete your 2010 income tax returns.