On December 17, 2010 President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  In addition to providing a 13-month extension of benefits for the long-term unemployed, the legislation includes an extension of the "Bush tax cuts" that were scheduled to expire on January 1, 2011. 

Other significant provisions include a new alternative minimum tax (AMT) "patch," a major modification of the estate tax, and a new 1-year 2% employee Social Security payroll tax reduction.

Included below are several of the major changes reflected in the new tax law.

Impact on Individuals

Income tax rates

The new law extends existing federal income tax rates for 2 additional years.  As in 2010, the federal tax brackets 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 highest tax bracket would have increased to 39.6%).

Tax rates for long-term capital gains and qualifying dividends

Existing tax rates for long-term capital gains and qualifying dividends are also extended through 2012.  As a result, long-term capital gain and qualifying dividends will continue to be taxed at a maximum rate of 15%.  For individuals in the 10% or 15% marginal income tax bracket, a special 0% rate will generally continue to apply.

Alternative Minimum Tax (AMT)

The Law includes another temporary "patch" for the AMT - tax years 2010 and 2011. AMT exemption amounts are slightly increased, and personal nonrefundable tax credits will be allowed to offset AMT liability through 2011.

Estate tax

The Law makes several major-though temporary-changes to the federal estate tax, including:

• For 2011 and 2012, the estate tax exemption amount (the applicable exclusion amount) will be $5 million per person (the $5 million will be indexed for inflation in 2012); the top estate and gift 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, but modified carryover basis rules)
• Beginning in 2011, the gift tax (reunified with the estate tax) will have a $5 million dollar exemption amount.
• 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 employee payroll tax

For the 2011 year, the employee portion of the Social Security tax is reduced by 2%. Normally equal to 6.2% of wages up to the taxable wage base ($106,800 in 2011), for 2011 this rate will be reduced to 4.2%. Self-employed individuals, who normally pay 12.4% for the Social Security portion of their self-employment taxes, will also benefit from a 2% reduction, paying the tax at a rate of 10.4% for 2011.

Key provisions extended through 2012 include:

• Itemized deductions and personal and dependency exemptions will not be reduced for higher-income individuals.
• Exclusion of up to $5,250 in employer-provided education assistance for undergraduate and graduate education.
• Increased child tax credit amount with expanded refund opportunity (15% of earnings above $3,000).
• Expanded credit for child and dependent care expenses (increased limit on eligible expenses and maximum credit percentage).
• An increased adoption tax credit and employer-paid adoption assistance exclusion amount; the credit also remains refundable.

Key provisions retroactively reinstated for 2010 and extended through 2011 include:

• The deduction for state and local sales tax in lieu of state and local income tax on Schedule A.
• Tax-free distributions to charitable organizations from IRAs by individuals age 70 1/2 or older (up to $100,000 per year); a special provision in the Act allows qualifying individuals to treat a distribution made from an IRA to a charity in January, 2011, as if it were made in 2010.

Impact on Businesses

"Bonus" depreciation

This new law increases the bonus depreciation percentage to 100% for new assets with useful lives of 20 years or less acquired and placed in service after September 8, 2010, and before January 1, 2012.  The Law extends bonus depreciation at the 50% level through 2012 (50% bonus depreciation will apply for property placed in service after December 31, 2011, and before January 1, 2013).

IRC Section 179 expense limits

Section 179 of the Internal Revenue Code allows businesses to deduct the cost of depreciable tangible personal property acquired for use in the business in the year of purchase, rather than through depreciation deductions. 

For tax years 2010 and 2011, the Small Business Jobs Act increased the maximum amount that may be expensed under Section 179 to $500,000 and increased the phase-out threshold amount to $2 million.

For 2012, the dollar limit amount and phase-out threshold level were scheduled to drop to $25,000 and $200,000, respectively.  This Law sets the IRC Section 179 expense limit for 2012 at its 2007 level - $125,000, with a phase-out threshold of $500,000 - indexed for inflation.

In summary, there were many changes to Individual, Corporate and Estate taxes within this new Law.  We have summarized the major components of the Law but there are other minor provisions which we did not mention.

Should you have any questions on the information included above, please feel free to call us.

Sincerely,

Mellott & Mellott, P.L.L.