By Ken Little
Recent federal tax bill is mostly good news for seniors and older taxpayers, several local CPAs said. The bill, signed in December by President Obama, extends breaks put in place under former President George W. Bush. It represents “a substantial victory for middle-class families across the country,” Obama said when the time the bill was signed.
Wealthy taxpayers will also benefit.
The bill stopped taxes from automatically going up on Jan. 1. It remains in effect for two years.
Many older Americans continue working to make ends meet in the current economy. The $658 billion package includes a 2 percent reduction in the Social Security payroll tax.
Workers who pay Social Security payroll taxes will see them reduced to 4.2 percent from the current 6.2 percent. The maximum tax break would be a little over $2,000, and the cut would expire after one year.
“You have got to be working (to receive it), so it really kind of left us where we were in 2010. Most 55-plus people should see a lower tax than they otherwise would have,” said Thomas Riley, a tax partner at Testone Marshall & Dicenza LLP in Syracuse.
Art Pearson, principal at Burdick and Pearson, CPAs, in Oswego, said the tax bill is generally positive for all Americans, including those 55 and over.
“The tax rates are going to stay the same for at least two years,” Pearson said. “You will notice that your payroll taxes collected on Social Security taxes will be less.”
The estate tax provision in the Obama compromise package has received a lot of publicity, primarily for what is perceived to be breaks given to those in high income brackets.
Obama and Republicans struck a deal that reinstates the estate tax at 35 percent and to exempt estates worth as much as $5 million per individual.
“Most people are not going to pay the estate tax, but a lot of people got excited about it,” Riley said.
That’s on a federal level.
“New York state is a problem because our taxes are high and our estate tax kicks in at $1 million,” Riley said. “With proper planning, most people can save most of their money. You’re not going to see that many people in Central New York affected.”
Pearson said New York will likely “decouple” from the federal adjustments, “so for New York state, a $1 million tax exemption is still in place.”
The estate tax “allows portability between spouses,” Pearson said. “Although you have no federal estate tax, there is going to be an opportunity even if you passed away in 2010 to apply the estate tax at the 35 percent, $5 million level and by doing that the value of the assets will get a step up in basis,” Pearson said. “What the step up in basis does, it allows you to use your estate best value for when your heirs sell one day. Heirs will have less tax when they sell their assets.
“If you have a good estate plan in place, you’re able to shelter up to $10 million in estate taxes. Generally you have an exclusion of $5 million (per person),” he said.
The 2009 estate tax limit was $3.5 million. There was no federal estate tax in 2010, and if the provision had not been included in the federal tax package, rates would have reverted to 2001 levels — $1 million for an individual or $2 million for a couple.
‘It would have been the last year of favorable tax provisions at the federal level,” Pearson said.
Individual tax rates will remain intact for 2011. Another benefit of the tax package is that capital gains and qualified dividends will have “the favorable (15 percent) tax rates most taxpayers have enjoyed since 2001”, Pearson said.
“If they want to sell stocks or receive dividends they’ll enjoy the tax rate they have enjoyed for the past nine years,” he said.
For the upcoming tax year, things will remain pretty much as they were, Riley said.
“Now it’s kind of status quo. You have a lot of the same (practices) you did the year before,” he said.
Older Americans need to take a comprehensive look at their financial picture at tax time, Riley said.
“It all ties together. A lot of things don’t stand on their own,” he said.
Deductions are one area to look at.
“You would be quite surprised how many people don’t itemize,” he said. Many older Americans opt for short forms or electronic filing and don’t
take advantage of deductions they could use, he said.
Seniors need to reassess health care options, Riley added.
“They need to look at health care and things like that. Costs are going up,” Riley said. “A lot of people don’t understand how expensive health insurance is.”
Another word of advice:
“People need to look at their wills to make sure they are set up properly,” Riley said.
“There are a lot of things you need to take into account, but overall, I would say it’s status quo.”