2010 Tax Relief Act: A Closer Look at the Benefits


	Scott Wrigley

May 2011

The 2010 Tax Relief Act: A Closer Look at the Benefits

The massive tax legislation that Congress passed in December was so extensive that, initially, most analyses focused only on the major provisions; here is a broader look at the personal benefits for many taxpayers

The Tax Relief Act that was passed in December solidifies many tax law provisions that expired at the end of 2009 or were scheduled to expire on December 31, 2010. In a January 2011 article we discussed some of the major provisions of the new law. Here is a recap of those provisions, plus a brief discussion of other provisions that affect many taxpayers in 2011.

Lower Tax Rates Stay in Place. For 2011 and 2012, the Tax Relief Act extends the existing individual tax rates (10%, 15%, 25%, 33% and 35%). In the absence of the new law, tax rates would have automatically increased.

Payroll Tax Cut. Most working Americans will get a modest raise in their 2011 paychecks, thanks to a drop (from 6.2% to 4.2%) in the employee share of the Social Security tax withheld from wages, up to the taxable wage ceiling of $106,800. The Social Security tax on self-employment income was also reduced by two percentage points.

Capital Gains. Favorable rates on capital gains and dividends remain. For 2010, long-term capital gains and qualified dividends are taxed at a maximum rate of 15% (0% for taxpayers in the lowest two brackets). The new law extends the low rates through December 31, 2012.

Estate Tax. The estate tax comes back but at a more favorable exclusion amount and tax rate than most observers expected. For 2011, the estate tax exclusion amount will be $5 million, and the maximum estate tax rate will be 35%. The new law also makes changes to the gift tax, estates of individuals dying in 2010, and the rules involving the tax basis of assets.

For more on estate and gift tax issues, see “Strategic Estate Planning.”

Higher Education Credit. For parents and students paying college tuition, the American Opportunity tax credit is now available through December 31, 2012. The credit begins to phase out for joint taxpayers when adjusted gross income reaches $160,000 ($80,000 for singles.) A separate deduction for higher education tuition was also extended through 2011. However, taxpayers cannot claim the American Opportunity credit in the same year that they claim the tuition deduction.

Married Couples. The “marriage penalty” is eased for two more years, addressing a situation in which getting married can cause a couple’s combined tax bill to be higher than when they were single. The new law extends marriage penalty relief through December 31, 2012.

Itemized Deductions, Personal Exemption. The itemized deduction and personal exemption phase-out rules for big earners are repealed for two more years. This is good news for higher-income taxpayers, who would have seen their itemized deductions and personal exemption write-offs phased out as their incomes reached certain limits.

Other Tax Breaks. Here are some other personal tax breaks that the new law extended:

Favorable rules involving student loan interest deductions, worth up to $2,500, are extended through 2012. Without the new law, there was scheduled to be a 60-month limit on deductible interest and a stricter phase-out provision that would have reduced or eliminated the write-off for many middle-income taxpayers.

The state and local sales tax deduction expired at the end of 2009. It has now been extended through December 31, 2011. This allows individuals who pay little or no state income tax the option of claiming an alternative itemized deduction for state and local sales taxes.

The charitable contribution of IRA proceeds is extended through the end of 2011. Under this provision, older owners of an individual retirement accounts (IRA) can give to charity in a different way. An IRA owner who is age 70½ or older can directly transfer, tax-free, up to $100,000 per year to an eligible charity. To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts transferred are not taxable, and no deduction is available for the transfer. However, amounts transferred to a charity are counted in determining whether the owner has met the IRA required minimum distribution rules for the year.

Business Tax Breaks Under the New Law

Bonus Depreciation. The new law doubles the 50% bonus depreciation to 100% for qualified business assets through 2011. This provision is available to all businesses for eligible assets placed in service between September 9, 2010, and December 31, 2011. For assets placed in service in 2012, 50% bonus depreciation will be available.

Research Tax Credit. This credit is renewed retroactively, from December 31, 2009, and extended through 2011. It is available to companies that introduce new products, improve current products, and develop or enhance their processes.

Work Opportunity Tax Credit. This credit, which is extended through 2011, provides financial incentives for employers to hire workers from certain disadvantaged groups. In general, it is worth 40% of up to $6,000 of the worker’s eligible wages during the first year. (Two previously targeted groups, unemployed veterans and “disconnected youth,” are not included in the extension.)

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.