Highlights of the New Tax LawJanuary 2011
New tax legislation, named the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, was signed into law on December 17, 2010. It extends the Bush-era tax cuts for an additional two years for taxpayers of all income levels. The legislation also includes a temporary solution for the estate tax, a payroll tax cut for all workers, an extension of unemployment benefits, a two-year patch for the AMT, as well as several other provisions.
Federal Income and Capital Gains Tax Rates: Cuts Extended
The 2010 federal income, capital gains and dividend tax rates have been extended for two more years, to 2012.
Alternative Minimum Tax: A Two Year Patch
The Act provides an AMT "patch" intended to protect middle-income taxpayers from being subject to the AMT. The law increases the exemption amounts for 2010 to $47,450 for individuals and $72,450 for married couples filing jointly. For 2011, exemptions increase even more, to $48,450 for individuals and $74,450 for married couples filing jointly. These increased exemptions ensure that approximately 20 million additional Americans will not have to pay AMT this year or next.
Employee-Paid Social Security Payroll Taxes: A One-Year Reduction
The law reduces employee-paid social security taxes by 2% for 2011 for all filers, regardless of income. This means employees will pay just 4.2% on earned wages next year, vs. the current 6.2%. The self-employed will pay 10.4% Social Security self-employment taxes, down from 12.4% in 2010. These reductions are for 2011 only and apply only to the first $106,800 in income.
Itemized Deduction Limitation Repeal: Extended to 2012
The limitation reducing the total amount of a higher-income individual’s otherwise allowable deductions was repealed for 2010, but was scheduled to return in full after 2010. The Act extends the repeal of this limitation and allows full deductibility for charitable contributions and other deductible items, regardless of income level.
Personal Exemption Phaseout: Extended to 2012
The 2010 Tax Relief Act extends the repeal of the personal exemption phaseout for two more years, through December 31, 2012. Without the two year extension, the phaseout would have reduced the value of exemptions allowable for high-income taxpayers.
Marriage Penalty Relief: Extended to 2012
The Act extends marriage penalty relief for two years through 2012. This relief was intended to mitigate the so-called “marriage penalty” by increasing the standard deduction for a married couple filing a joint return to twice the amount for a single individual. In addition, the size of the 15% income tax rate bracket was temporarily expanded for married couples filing a joint return to twice that of single filers.
Federal Estate Tax: Reinstated at 35%
The new law revives the Federal estate tax at a maximum rate of 35% with an exclusion amount of $5 million, and a stepped-up cost basis.
The Act gives estates of decedents dying in 2010 the option to elect to apply either (1) the new estate tax based on the 35% top rate and the $5 million exemption, along with the stepped-up cost basis rule or (2) no estate tax, along with the modified carryover cost basis rule from 2010. Executors will have nine months after December 17, 2010 to make this decision.
Gift Tax: An Increased Exclusion Amount
Gifts made in 2010 were subject to a 35% gift tax for any gift above a $1 million exclusion. The new law retains the 35% rate, but increases the maximum applicable exclusion amount to $5 million for gifts made in 2011 and 2012.
Generation Skipping Transfer Tax: Reinstated at 35%
For gifts made to grandchildren or other more distant generations in 2011 and 2012, the GST tax rate is reinstated from 0% to a 35% rate, with a $5 million exclusion.
Exemptions for Married Couples: Unused Portions Are Portable
The Act provides for "portability" between spouses of the maximum exclusion. This allows a surviving spouse to take advantage of any unused portion of their deceased spouse’s $5 million exclusion. The surviving spouse must make this election on a filed estate tax return.
This communication is intended to provide general information. The information and opinions stated are as of December 21, 2010, unless otherwise indicated, and do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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