Tax Relief Act of 2010 Has Something for Everyone
Nearly every individual taxpayer and every business in America can lay claim to some part of the Tax Relief and Job Creation Act of 2010, which was signed by the president on Dec. 17, 2010. After much debate and compromise, some key provisions include:
- Lower individual income tax rates have been extended for two years
- The 15 percent rate on dividends and capital gains is extended for two years
- Workers will pay less payroll tax in 2011
- The estate tax returns with a higher exemption level and lower rate
- Businesses can take 100 percent depreciation on certain 2010 and 2011 capital expenditures
- The R & D tax credit returns
While the debate over the economics of the more than $800 billion bill continues, most taxpayers welcome the certainty of knowing what’s ahead. Here is a brief look at highlights of the new law and some of its potential impact.
Individual Tax Relief
Individual Income Tax Rates Unchanged for Two More Years
The so-called Bush-era tax cuts that were the focus of much debate will remain unchanged through Dec. 31, 2012. Individual income tax rates range from 10 percent to 35 percent for 2011 and 2012, rather than the 15 percent to 39.6 percent rates that would have automatically taken effect at the end of 2010. The ultimate fate of these decade-old rates will be left until 2012, when they are set to expire again.
Capital Gains and Dividend Rates Stay the Course
Lower tax rates on capital gains and qualified dividends were set to expire at the end of 2010, with a 20 percent rate on capital gains and normal tax rates on qualified dividends kicking in for 2011. Now the rates will continue at 15 percent (or 0 percent for taxpayers in the lowest income brackets.). Qualified dividends are generally those received from a domestic corporation on stock held for at least 61 days.
No Limits on Itemized Deductions
The “Pease” limitation reduces the total amount of itemized deductions that high income taxpayers would otherwise be allowed. The Pease limitation was repealed for 2010 so there are no limitations on deductions for that year. The new law extends full repeal of the Pease limitation for 2011 and 2012.
No Phase-out of Personal Exemptions
Before 2010, taxpayers at certain income levels saw a phase-out of their allowable personal exemptions. The Economic Growth Tax Relief Reconciliation Act (EGTRRA) of 2001 provided for the return of the phase-out beginning in 2011. The new tax law extends the repeal of personal exemption phase-outs through Dec. 31, 2012.
Marriage Penalty Relief Extended
Before EGTRRA took effect, married couples filing a joint return were only allowed the same basic standard (non-itemized) deductions as single taxpayers. But EGTRRA increased the standard deduction for couples to nearly twice the level of singles. That treatment would have expired at the end of 2010, but the new law extends it for another two years.
Credit for Qualified Children Stays at $1,000
The child tax credit was scheduled to drop from $1,000 to $500 per qualified child at the end of 2010. The new law extends the $1,000 credit level though Dec. 31, 2012. The credit begins to phase out for taxpayers with adjusted gross income of $75,000 for singles and $110,000 for couples filing jointly.
Earned Income Tax Credit
The current earned income tax credit, including all enhancements passed since EGTRRA, is extended for another two years through Dec. 31, 2012.
Continuing Relief for Job-Seeking Taxpayers
The maximum amount of credit for allowable dependent care expenses related to holding a job or seeking employment stood at $3,000 for 2010 (up to $6,000 for more than one qualified individual). These enhanced levels would have expired at the end of 2010, but have instead been extended for two years.
Two More Years of Credit for College Expenses
The American Opportunity Tax Credit offers a generous credit for higher education costs. The current credit level would have expired at the end of 2010 and returned to pre-2009 levels (which were not as generous). So, through Dec. 31, 2012, the maximum credit is $2,500 for qualified higher education expenses for qualified individuals (100 percent of the first $2,000 of expenses and 25 percent of the next $2,000).
Credit Remains for Educational Assistance Exclusion
Employees can exclude up to $5,250 from income and employment taxes for employer-provided educational expenses. Set to expire at the end of 2010, the benefit has been extended through 2012.
Another Patch for the Alternative Minimum Tax
In an attempt to keep still more middle income taxpayers from falling under the AMT, higher exemption amounts will be in effect for 2010 and 2011. For 2010, the exemption amount increases to $47,450 for individuals and $72,450 for married couples filing jointly. The amount increases in 2011 by $1,000 for singles, and $2,000 for married couples filing jointly. Without this patch, the minimum AMT exemption would have fallen to $33,750 for singles and $45,000 for married couples filing jointly.
A Cut in Payroll Taxes for all Workers
A payroll tax holiday, intended to inject $120 billion into the economy, is included in the new law. Last year’s Making Work Pay credit will be allowed to expire at the end of 2010. The 2010 Tax Relief Act provides a temporary reduction in the OASDI (Old Age Survivors Disability Insurance) portion of social security tax for wage earners from 6.2 percent to 4.2 percent. In dollars, this means that an individual earning at or above the cap of $106,800 could receive a tax benefit of up to $2,136. Self-employed individuals would pay 10.4 percent on self-employed income.
Employer-Provided Child Care Credit Extended
Employers can receive credit for up to $150,000 of the qualified cost of making child care available for employees. Set to expire after 2011, the credit is now extended through 2012.
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