Late yesterday evening the U.S. House of Representatives approved the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 1010 (Tax Relief Act of 2010), and President Obama is expected to sign it today. The following is a brief summary of the key tax provisions:
Income Tax Rates: Current rates will remain in effect for 2011 and 2012. (Top ordinary income rate of 35% and 15% on qualified dividends and long term capital gains.)
Social Security Payroll Tax: The rate paid by employees will be reduced from 6.2% to 4.2% for employees and from 12.4% to 10.4% for self-employed persons.
Estate Tax: The estate tax which had been repealed for 2010 is reinstated for 2010 and future years with a top rate of 35% for 2011 and 2012, and a $5,000,000 per individual exemption amount which is indexed for inflation after 2011. Although the law is retroactive for 2010, estates of persons dying in 2010 can choose whether to have the new law or the old law (no estate tax and carry over basis) apply. The new law also allows the estate of a surviving spouse to use any unused portion of a deceased spouse’s exemption amount.
Gift Tax and Generation Skipping Tax: The gift tax exemption amount will be increased to $5,000,000 to be the same as the estate tax exemption amount. This increase is not retroactive for 2010. This “reunification” of the exemption amounts means that individuals can use the single “unified” $5,000,000 amount to cover taxable gifts during life or estate at death, or a combination of both. Like the estate tax, the top gift tax rate is also 35% for 2011 and 2012, which is the same as under current law for 2010. The generation skipping tax (GST) exemption is also increased to $5,000,000 in 2011 (from $1,000,000 in 2009). The GST is a tax separate from the estate and gift taxes that applies if a person makes taxable gifts or leaves all or part of their estate to grandchildren whose parent is still alive. The top GST rate is 35% for 2011 and 2012. Although the GST is reinstated for 2010, the rate is zero.
Itemized Deductions and Personal Exemptions: Through 2012 there will be no overall limitation on itemized deductions based on a taxpayers adjusted gross income. Personal exemptions will not be phased out in 2011 and 2012 as previous law provided.
Alternative Minimum Tax: The AMT exemption will remain near current levels for 2010 and 2011. Without this change it is estimated that 21 million additional taxpayers would owe AMT for 2010.
Credits for Working Families: Several credits for working families introduced in 2009 will be retained, including the $1,000 child tax credit, the earned income credit, and the higher education tax credit.
Additional First Year Depreciation: The new law leaves in place the existing rules as to what kinds of property qualify for additional first-year depreciation, but for such property placed in service between September 8, 2010 and December 31, 2011 (through December 2012 for longer-lived and transportation property) the additional first year depreciation is 100%; i.e., complete write off.
Small Business (Section 179) Expensing: The maximum amounts and phase-out level applicable for 2010 and 2011 remain in place ($500,000 maximum and $2,000,000 phase-out). For 2012 the maximum amount will be $125,000 (indexed for inflation) and $500,000 phase-out level.
The political tradeoff for these mostly favorable tax provisions is the extension through 2011 of the federal unemployment benefit program, which provided a maximum of 99 weeks of benefit and which expired in November.
This brief overview of some important considerations associated with The Middle Class Tax Relief Act of 2010 is by no means comprehensive. Always seek the advice of a competent professional when making important legal and financial decisions.