There has been a lot of media attention regarding the 2010 Tax Relief Act signed into law today by President Obama. The following are major highlights of the new tax legislation:
The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%) for 2011 and 2012.
For 2011, there will be a two-percentage-point payroll/self-employment tax holiday for employees and self-employed individuals. As a result, employees will pay only 4.2% Social Security tax on wages and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.
Capital Gains and Qualified Dividends
For 2011 and 2012, long-term capital gains (with the exception of 28% rate gain and unrecaptured section 1250 gain) will continue to be taxed at a maximum rate of 15% (instead of 20%), and qualified dividends paid to individuals will be taxed at the same rates as long-term capital gains (instead of being taxed at the same rates that apply to ordinary income).
Standard Deduction For Married Taxpayers
The basic standard deduction for a married couple filing a joint return will remain twice the basic standard deduction for an unmarried individual filing a single return for 2011.
Itemized Deductions and Personal Exemptions
For 2011 and 2012, itemized deductions of higher-income taxpayers will not be reduced (instead of being reduced by 3% of adjusted gross income (“AGI”) above an inflation-adjusted figure, but the reduction couldn’t exceed 80%), and a higher-income taxpayer’s personal exemptions will not be phased out when AGI exceeds an inflation-adjusted threshold (instead of being phased out).
Alternative Minimum Tax (“AMT”)
The AMT exemption amounts for individuals for 2010 will be increased (instead of being lowered which would have resulted in more individual taxpayers having to pay the AMT).
Estate Tax Relief and Estate Planning
Until the new legislation, there was no estate tax or generation-skipping transfer tax (“GST”) in 2010. For 2011 and 2012, there will be lower estate taxes and GST by increasing the exemption amount to $5 million (instead of $1 million), and reducing the top rate to 35% (instead of 55%). Estates of decedents who died in 2010 can now choose between (1) applying an estate tax (based on a $5 million exemption and 35% top rate) with beneficiaries receiving a step-up in income tax basis for inherited assets or (2) not applying an estate tax with beneficiaries only receiving a modified carryover income tax basis for inherited assets. For gifts made after December 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a gift tax rate of 35%. The GST tax exemption for decedents dying or gifts made after December 31, 2009, is equal to the applicable exclusion amount for estate tax purposes, which is now $5 million for 2010. Although the GST is now applicable in 2010, the GST tax rate for transfers made during 2010 is 0%. Effective for estates of decedents dying after December 31, 2010, the executor of a deceased spouse’s estate can transfer any unused exemption amount to the surviving spouse.
Incentives for Businesses to Invest in Machinery and Equipment
Under the legislation, there is a 100% writeoff in the placed-in-service year of the cost of property eligible for bonus depreciation (this will apply for property acquired and placed in service after September 8, 2010, and before January 1, 2012), and a 50% bonus first-year depreciation allowance for property placed in service in 2012. The election to accelerate the AMT credit instead of claiming additional first-year depreciation has been extended through December 31, 2012. In addition, for tax years beginning after December 31, 2011, the maximum expensing amount under Code Section 179 will be $125,000 and the investment-based phaseout amount will be $500,000 (up from $25,000/$200,000). For 2010 and 2011, these amounts are $500,000/$2 million, respectively.