Final 2010 tax changes

Late 2010 law extends Bush-era tax rates for two years

After weeks of wrangling over the details, Congress passed a bill that will extend the tax rates in effect in 2010 for another two years, through December 31, 2012.  President Obama signed the “2010 Tax Relief Act” into law on December 17, 2010.

 Here’s an overview of the key provisions in the law.

 * TAX RATES.

The existing tax rates established in the 2001 and 2003 tax laws will continue for all taxpayers through 2012. This means the top tax rate for 2011 and 2012 will remain at 35% instead of reverting to 39.6%.

* CAPITAL GAINS AND DIVIDENDS.

The top rate for dividends and long-term capital gains will remain at 15%. A 0% rate applies to taxpayers in the two lowest ordinary income brackets.

 * ITEMIZED DEDUCTIONS AND PERSONAL EXEMPTIONS.

Higher-income taxpayers will not have their itemized deductions limited and their personal exemptions phased out.

 * EDUCATION TAX BREAKS.

The law extends through 2012 the American Opportunity Tax Credit, the income exclusion for up to $5,250 of employer-provided education assistance to employees, and the education savings account contribution limit of $2,000.

 * ALTERNATIVE MINIMUM TAX (AMT).

The AMT was given another “patch” for 2010 and 2011, a move that will keep the tax from hitting millions more taxpayers.  For 2010, the exemption amount is $47,450 for individuals and $72,450 for married couples filing joint returns.

 * PAYROLL TAX CUT.

For 2011, the employee rate for social security tax is cut from 6.2% to 4.2% on wages up to $106,800. Self-employed individuals will pay 10.4% on self-employment income up to $106,800.  Employers will continue to pay 6.2% on employee wages.  This payroll tax rate cut does not affect the Medicare portion of payroll taxes for either employees or employers.

 * EXTENDERS.

Effective for 2010 and 2011 returns, taxpayers have the option of deducting state and local sales taxes instead of state and local income taxes.  The deduction for up to $4,000 of higher education expenses and the deduction for teachers who buy classroom supplies are extended. Those aged 70½ or older may again contribute up to $100,000 tax-free from an IRA to charity.

* BUSINESS PROVISIONS.

The law extends the research tax credit for 2010 and 2011, and it extends the work opportunity tax credit through 2011. Bonus depreciation is increased from 50% to 100% for qualified business purchases made from September 9, 2010, through December 31, 2011. 50% bonus depreciation will be available in 2012.

 * ESTATE TAX.

The law restores the estate tax retroactive to January 1, 2010, and continues it through December 31, 2012. It establishes a top rate of 35% and an exclusion amount of $5 million ($10 million for married couples).  Estates of persons who died in 2010 have the option of applying the estate tax and receiving a step-up in basis on property passing to heirs or having no estate tax but using a carryover of the decedent’s basis in property.

Please contact us if you have any questions.

Evelyn

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