How physicians are affected by the 2010 tax law

March 1, 2011

The Reid Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will likely affect your 2010 taxes.

Q Can you summarize the changes in the new tax law that most impact physicians?

Extension of tax-free distributions from individual retirement plans for charitable purposes. The Reid Act extends for 2 years (through 2011) the provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year. Account owners must be 701/2 years of age or older.

Temporary repeal of the personal exemption phase-out. Personal exemptions allow a certain amount per person to be exempt from tax. Due to the personal exemption phase-out (PEP), the exemptions are phased out for taxpayers with adjusted gross income (AGI) above a certain level. Previous law repealed PEP for 2010. The Reid Act extends the repeal of PEP for an additional 2 years, through 2012.

Temporary repeal of the itemized deduction limitation. Generally, taxpayers itemize deductions if the total deductions are more than the standard deduction amount. Since 1991, the amount of itemized deductions that a taxpayer may claim has been reduced, to the extent the taxpayer's AGI is above a certain amount. This limitation is generally known as the "Pease limitation." Previous law repealed the Pease limitation on itemized deductions for 2010, but the Reid Act extends the repeal of the Pease limitation for an additional 2 years, though 2012.

2-year AMT patch. Previously, a taxpayer received an exemption of $33,750 (individuals) and $45,000 (married filing jointly) under the alternative minimum tax (AMT). Nonrefundable personal credits against the AMT were not allowed. The Reid Act increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly). Nonrefundable personal credits against the AMT are also allowed under the new bill, which is effective for taxable years beginning after Dec. 31, 2009.

Temporary reduction in employee-paid payroll taxes. Under the previous law, employees would have paid a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011), and self-employed individuals would have paid 12.4% Social Security self-employment taxes on all their income up to the same threshold. The Reid Act provides a payroll/self-employment tax holiday during 2011 of two percentage points. This means employees will pay only 4.2% on wages, and self-employed individuals will pay only 10.4% on self-employment income up to the threshold.

Temporary estate, gift, and generation-skipping transfer tax. Previous law phased out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35% and increased the gift tax exemption to $1 million for 2010. The Reid Act sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35% for the estate, gift, and generation-skipping transfer taxes for 2 years, through 2012. The exemption amount is indexed beginning in 2012.

The law became effective on Jan. 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after Jan. 1, 2010 and before Jan. 1, 2011, and sets a $5 million generation-skipping transfer tax exemption and 0% rate for the 2010 year.