Legislation passed in December 2010 will keep tax rates and rules much the same as they have been for another two years. With the signing of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (short title: 2010 Tax Relief Act) on December 17, 2010, the Bush-era income tax cuts were extended for all taxpayers. Without this extension, the top income tax rate would have gone to 39.6% on January 1, 2011, and many other provisions would have created higher taxes for most Americans. The law also provides a 13-month extension of unemployment benefits.
The new law keeps the 15% rate on capital gains and dividends (0% for those in the lowest two ordinary income tax brackets) for another two years. It increases the alternative minimum tax exemption amount for 2010 and 2011 to prevent the tax from hitting some 20 million taxpayers.
Tax breaks that had expired at the end of 2009 were retroactively extended for 2010 and 2011. These include the business research and development credit, the optional deduction for state and local sales taxes, the teachers’ deduction for buying classroom supplies, and the deduction for college expenses. Taxpayers 70½ and older may again donate up to $100,000 tax-free from their IRAs to charity.
The American Opportunity Tax Credit for higher-education expenses is extended for two years, and the higher $2,000 contribution limit to Coverdell education savings accounts is extended through 2012.
Bonus depreciation for the purchase of qualified business equipment is increased from 50% to 100% from September 9, 2010, through December 31, 2011.
Workers will see bigger paychecks in 2011, thanks to a reduction in social security taxes. The employee rate for social security tax is cut from 6.2% to 4.2% on wages up to $106,800. The Medicare portion of payroll taxes is not affected, and employers will continue to pay at the 6.2% rate. Self-employed individuals will pay 10.4% on their self-employment income up to $106,800.
The estate tax was retroactively restored for 2010, with a top rate set at 35% and an exclusion amount set at $5 million through 2012.
For planning guidance under this latest tax law, contact our office.
