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2010 Tax Relief Act Passed by Congress

Congress Passes a Two-Year Extension of Tax Cuts

Congress has passed a tax cut package called the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act), which President Obama signed December 17, 2010. Passing the Act avoids a variety of tax increases that were scheduled for January 1, 2011 on all taxpayers.

The 2010 Tax Relief Act extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years, with a top federal estate tax rate of 35 percent for the next two years, a two year AMT patch, a one-year payroll tax cut, and more. Here is a summary of notable items:

Income Tax Rates - Income tax rates for individuals will remain at current levels of 10%, 15%, 25%, 28%, 33%, and 35% for two years (2011 and 2012) for all taxpayers.

Personal Exemptions and Itemized Deductions -The Bush tax cuts repealed limits to the personal exemptions and itemized deductions that taxpayers earning over a certain amount could claim. These exemption and deduction limits were scheduled to return in 2011, but will now remain repealed through 2012.

Capital Gains/Dividends -The 2010 Tax Relief Act leaves in place the maximum tax rate of 15 percent, and zero percent for taxpayers in the 10 and 15 percent income tax brackets. The zero percent rate will be important to many taxpayers such as graduate students, retirees, and those who live on their portfolio savings. The maximum tax rate on capital gains had been scheduled to rise in 2011 to 20 percent, and the rate on dividends would have risen to the tax rates on regular income.

Alternative Minimum Tax -The Act contains an AMT patch for two years, meant to prevent additonal taxpayers from paying AMT.

Social Security Tax -The payroll tax rate paid by employees will be reduced from 6.2% to 4.2% for 2011. The employer rate will remain at 6.2%.

Estate and Gift Tax -The top tax rate is reduced to 35% and the exclusion for 2011 and 2012 is $5 million per spouse ($10 million per couple.) For taxpayers who pass away in 2010, their estate can choose between paying estate tax with the new $5 million exemption and a 35% top tax rate plus a step-up in basis for calculating capital gains, or this year's zero estate tax and modified carryover basis treatment for capital gains (the 2010 rules).

The Act re-unifies the estate and gift taxes for 2011 and 2012, allowing use of the $5 million exclusion amount during lifetime or upon death. The top gift tax rate is 35%.

IRA Charitable Contributions - Seniors may contribute up to $100,000 tax-free from an IRA to a charity in 2011 and 2012. In addition, the Act allows distributions made in January 2011 to count toward the 2010 minimum distribution requirement.

Business Expense - The Act allows 100% of qualified capital improvements to be expensed in 2011, and 50% in 2012.

Since these tax cuts are only good for the next two years, we can expect another political battle over taxes in 2012.

This is a summary of key items in the legislation passed by Congress on December 16, 2010, and is not a complete list of all provisions in the Act. Please contact our tax professionals if you have questions about this, or any other tax issues. Call us at 877.517.6872.