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The Bush-Era Tax Cuts Live On December 21, 2010
A holiday gift for taxpayers: After a 277-148 passage in the House and an 81-19 approval in the Senate, President Obama signed the 2010 Tax Relief Act into law on December 17, extending the Bush-era tax cuts.1 Here is the impact of the new legislation:
Current federal income tax rates are preserved for everyone. The federal income tax brackets will remain at 10%, 15%, 25%, 28%, 33% and 35% for 2011 and 2012.2
Unemployment insurance extends for 13 more months. This is retroactive, so the federal extension of long-term jobless benefits applies from December 2010 through December 2011.2
A payroll tax (Social Security tax) holiday occurs in 2011. The payroll taxes (Social Security taxes) that employees pay will drop from 6.2% to 4.2% next year. (There will be no payroll tax cut for employers in 2011, only employees.) As envisioned, this will result in a savings of about $1,000 next year for a wage earner bringing home $50,000. This replaces the Making Work Pay credit.3,4,5
The tax law has been amended to reinstate estate taxes in 2011. In 2010 there were no federal estate taxes, but the estate tax exemption was scheduled to be reinstated in 2011 with an exemption of only $1,000,000. However, after some wrangling the two parties agreed to reinstate the estate tax with an exemption of $5,000,000, and the federal estate tax rate of 35% on estates in excess of $5,000,000.2
Tax breaks for middle-class and working-class families won’t sunset. As a result of the new law, the child credit, the child and dependent-care credit, the EITC, and a $2,500 tax credit for higher education expenses will all be around in 2011.5,6
No marriage penalty. The new law wards off the comeback of the marriage penalty so that married couples may take a more generous standard deduction.6
Taxes on capital gains and dividends top out at 15%. Passage of the 2010 Tax Relief Act means rates will top out at 15% through 2012.7
Businesses may expense 100% of their investments in 2011. In fact, qualified investments made after September 8, 2010 and before January 1, 2012 are eligible for this bonus depreciation. In addition, 50% expensing will be available for qualified property placed in service during 2012, and so-called “long-lived” property and transportation property may be eligible for 100% expensing if it goes into service prior to 2013.7
The tax break for IRA gifts to charity returns. The IRA charitable rollover, as it was informally called, was much beloved by non-profits and IRA owners, but it went away in 2010. In basic terms, it allowed someone 70½ or older to donate up to $100,000 in IRA assets annually to one or more qualified charities. This opportunity is back for 2011 – and the especially good news is that Congress included a special rule in the new tax bill allowing IRA gifts made in January 2011 to count for 2010.8
An AMT patch, of course. Congress decided it might as well take care of that. It passed an AMT (Alternative Minimum Tax) fix as part of the 2010 Tax Relief Act, thereby exempting about 20 million middle-income households from a potential $3,900 average leap in federal income taxes.6
What’s the price tag of all this short-term tax relief? It is sizable. The federal deficit is projected to increase by about $858 billion over the next two years as a consequence.5
During these difficult times we are thankful for our many blessings. We are especially thankful for our clients and wish everyone and their families the best holiday ever.
Sincerely,
All of us at Kohlhepp Investment Advisors, Ltd.
This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.
Citations. 1 - edition.cnn.com/2010/POLITICS/12/17/tax.deal/ [12/17/10] 2 - online.wsj.com/article/SB10001424052748703296604576005430598327972.html [12/7/10] 3 – npr.org/2010/12/10/131969824/some-worry-payroll-tax-cut-threatens-social-security [12/10/10] 4 – businessweek.com/news/2010-12-10/u-s-tax-vote-may-be-too-late-to-cut-payroll-levy.html [12/10/10] 5 –startribune.com/politics/112046564.html? [12/16/10] 6 –businessweek.com/ap/financialnews/D9K5IEN81.htm [12/17/10] 7 –tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf [12/16/10] 8 – online.wsj.com/article/SB10001424052748703395904576025610771041244.html [12/17/10] 9 – montoyaregistry.com/Financial-Market.aspx?financial-market=roth-ira-rules-and-regulations&category=1 [12/18/10]
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