HIGHLIGHTS
On December 17, 2010, the President signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, generally called the 2010 Tax Relief Act. There are many provisions affecting both individuals and businesses, including many ?extenders? ? that is, laws that were scheduled to expire but that have been extended.
Payroll tax cut: Beginning with their first paycheck in 2011, employees will get a 2% reduction in their Social Security tax. Self-employed individuals will get a similar reduction in their self-employment tax.
Individual tax rates: Rates, including the reduced rate on capital gain and dividends, were scheduled to go up in 2011. The lower 2010 rates are extended through 2012.
Education benefits: The American Opportunity Tax Credit (a credit for certain college expenses) was scheduled to expire after 2010. It has been extended through 2012.
Deductions: Certain deductions scheduled to expire after 2009 were extended, including the $250 teacher expense deduction, the itemized deduction for sales taxes, and the deduction for mortgage insurance premiums. Student loan interest income limits will remain at the 2010 levels, meaning more individuals will be able to deduct this interest.
The IRA to charity deduction for charity: This is extended through 2011. Under this provision, an individual who is at least 70½ years old can request the IRA trustee make a direct transfer of IRA funds to a qualified charity. The amount distributed is not included as income and not deductible as a charitable contribution. For those wishing to make charitable contributions, this is a tax-efficient way to take a required minimum distribution. In addition, the new law will permit a distribution on or before January 31, 2011, to be treated as if made in 2010. This is an area where planning before the end of January would be a good idea.
Credit for nonbusiness energy property: The tax credit of up to $1,500 for residential energy improvements (such as energy efficient windows) was set to expire after 2010. It was extended through 2011. However, the new law reduces the maximum credit to $500, and there are further restrictions.
Bonus depreciation and §179 business expensing: Businesses will be able to expense 100% of certain equipment purchased after September 8, 2010, and before January 1, 2012. Restrictions apply.
Other business provisions: Certain business provisions were extended including:
· The Work Opportunity Credit;
· The Research Credit;
· Employer credit for child care assistance;
· Employer education assistance; and
· Enhanced transportation fringe benefits.
Estate tax: The estate tax exclusion was set at $5 million and the top tax rate at 35%. These amounts are good through 2012. For an individual dying in 2010, there is a choice as to whether to pay estate tax or use a complex 2010 provision that means no estate tax, but valuation of assets for the beneficiaries may cause tax later. If you have a family member that this applies to, or are an executor for a decedent dying in 2010, we need to discuss which is the best choice.
Not extended: Key provisions that were not extended include the Making Work Pay Credit (2010 is the last year) and the standard deduction for property taxes (2009 was the last year). Taxpayers who itemize can still deduct property taxes.
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