Fourth Quarter, 2010
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act was signed into law on December 17, 2010, extending many of the so-called “Bush tax cuts,” benefiting both individuals and businesses. Some of the more notable provisions include:
- Ordinary income tax rates. The December 2010 Act extends the lower ordinary income tax rates through December 31, 2012, such that the lowest rate will be 10% and highest rates will be 35%. Essentially, all income tax brackets will remain at their current level through December 31, 2012.
- Capital gain and dividend tax rates. The current tax brackets will remain in existence through December 31, 2012, such that taxpayers below the 25% tax bracket will pay 0% on long-term capital gains and dividends, and those above the 25% tax bracket will pay 15% on long-term capital gains and dividends.
- Alternative Minimum Tax Relief. The December 2010 Act extended the increase in the alternative minimum tax personal exemption amount through December 31, 2011 of $74,450 for married taxpayers and $48,450 for single taxpayers, reducing the number of taxpayers subject to the AMT.
- IRA Gifts to Charity. Through 2011, distributions from an IRA directly to a charity will be tax-free, provided the taxpayer is over age 70½ and the maximum distribution is $100,000. Planning Opportunity: taxpayers may elect to treat distributions made in January, 2011 as if they were made in December 2010.
- FICA and Self-Employment Tax Decrease. For calendar year 2011, the self-employment tax rate and the employee FICA tax rate will be reduced by 2% resulting in a self-employment tax rate of 10.4% and an employee FICA tax rate of 4.2%.
- Bonus Depreciation and Section 179 Deductions Increase. For assets placed into service between September 8, 2010 and December 31, 2011, taxpayers will be allowed 100% bonus depreciation, and 50% bonus depreciation for property acquired and placed into service during calendar year 2012. Beginning in 2012, the Section 179 deduction will be $125,000, phasing out at $500,000 during 2012 and at $200,000 in 2013.
- Exclusion of Gain on Small Business Stock. The Small Business Jobs Act passed in September excluded 100% of the gain on small business stock acquired between September 27 and December 31, 2010. The December 2010 Act extends this 100% exclusion to small business stock acquired through December 31, 2011.
- Personal Exemption and Itemized Deductions Phase-Out. During 2010 the phase-out of the personal exemptions and itemized deductions for high income taxpayers were not applicable, and the December 2010 Act extends these provisions for another two years through December 31, 2012.
- Larger Child Tax Credit. The tax credit for dependent children will remain at $1,000 with a phase-out for married couples of $110,000 and singles above $75,000.
- Marriage Penalty Relief. The provisions minimizing the marriage penalty, i.e. a larger standard deduction and 15% tax bracket, were extended through December 31, 2012.
- Adoption Program. The tax credit for adopting a child will remain at $10,000 through 2012. Additionally, the amount of tax-free employer-provided adoption benefits will remain at $10,000 through 2012.
- Education Incentives. The following education incentives have all been extended through 2012:
- Employer-provided education assistance up to $5,250 will remain tax free to the employee;
- The expanded student loan deduction will remain;
- The maximum contribution to Coverdell accounts will remain $2,000 and K-12 costs will continue as a qualified expense;
- The American Opportunity Tax Credit will continue.