The Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of
2010, signed into law on December 17, 2010, is the
end result of President Obama's compromise with the
GOP to extend the "Bush tax cuts" set to
expire at year-end. In addition to providing a 13-month
extension of benefits for the long-term unemployed
and extending expiring provisions, the Act includes
several new tax provisions. Here's what you need to
know:
Tax Rates
The Act extends existing federal income tax rates
for two additional years. As in 2010, the federal
tax bracket rates for 2011 and 2012 will be 10%, 15%,
25%, 28%, 33%, and 35%. (Without this legislation,
federal income tax rates would have increased beginning
in 2011--the current 10% federal income tax bracket
would have disappeared, and the five remaining tax
brackets would have been 15%, 28%, 31%, 36%, and 39.6%.)
Existing tax rates for long-term capital gains and
qualifying dividends are also extended through 2012.
As a result, long-term capital gains and qualifying
dividends will continue to be taxed at a maximum rate
of 15%. If you're in the 10% or 15% marginal income
tax brackets, a special 0% rate will generally continue
to apply.
Alternative minimum
tax (AMT)
The alternative minimum tax (AMT) is essentially
a parallel federal income tax system, with its own
rates and rules. To prevent a dramatic increase in
the number of individuals subject to AMT, the Act
retroactively increases AMT exemption amounts for
2010, and extends the increased exemption amounts
to 2011. Nonrefundable personal income tax credits
will also continue to be allowed to offset AMT liability
in 2010 and 2011.
Estate Tax
The Act makes major, though temporary, changes to
the federal estate tax. For 2011 and 2012, the estate
tax exemption amount (the applicable exclusion amount,
renamed the basic exclusion amount) will be $5 million
per person (the $5 million will be indexed for inflation
in 2012); the top transfer tax rate for these years
will be 35%. The $5 million exemption amount and 35%
top estate tax rate will apply retroactively to 2010
as well, but for individuals who died in 2010, an
election can be made to choose the estate tax provisions
effective prior to this legislation (i.e., no estate
tax applies, but special modified carryover basis
rules apply); an extended due date is provided for
individuals who died on or after January 1, 2010,
and before December 17, 2010. For 2011 and 2012, when
one spouse dies, any unused portion of that spouse's
estate tax exemption amount may be transferred to
the surviving spouse.
One-year reduction
in Social Security payroll tax
If you're an employee, 6.2% of your covered wages
up to the taxable wage base ($106,800 in 2011) is
generally withheld for your portion of the Social
Security retirement component of FICA employment tax.
If you're a self-employed individual, you pay 12.4%
for the Social Security portion of your self-employment
tax. The Act implements a one-year 2% reduction in
this tax. That means for 2011, you'll pay the tax
at a rate of 4.2% if you're an employee, and 10.4%
if you're self-employed.
Depreciation
and IRC Section 179 expensing
If you're a business owner or self-employed individual,
you may know that an additional 50% depreciation deduction
has been available for qualifying property placed
in service during 2010. The Act increases the bonus
depreciation percentage allowed to 100% for property
acquired and placed in service after September 8,
2010, and before January 1, 2012. The Act also extends
bonus depreciation at the 50% level through 2012 (the
50% bonus depreciation will apply for property placed
in service after December 31, 2011, and before January
1, 2013).
For tax years 2010 and 2011, the Small Business Jobs
Act increased the maximum amount that could be expensed
under IRC Section 179 to $500,000 and increased the
phaseout threshold amount to $2 million. For 2012,
the dollar limit amount and phaseout threshold level
were scheduled to drop to $25,000 and $200,000, respectively.
This Act sets the IRC Section 179 expense limit for
2012 at its 2007 level--$125,000, with a phaseout
threshold of $500,000--indexed for inflation.
Education provisions
