As you are likely aware, two major bills enacting tax cuts for individuals will expire at the end of 2010: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Act 2010) extends quite a few provisions from EGTRRA and JGTRRA for an additional two years, most through 2012. It also extends a number of provisions enacted as part of EGTRRA that were modified in the American Recovery and Reinvestment Act of 2009 (ARRA).
Below is a summary of some of the more important provisions that will be extended:
Reduction in Employee Payroll Tax
The 2010 Tax Act provides for a temporary reduction, for 2011 only, of the employee-paid Social Security payroll tax, from 6.2% to 4.2%. Self-employed individuals will see a reduction in the SE tax from 12.4% to 10.4%. The same threshold applies as in 2010 – only the first $106,800 is taxed for Social Security.
Individual Income Tax
Temporarily extend the 10% bracket – if the extension hadn’t passed, the 10% individual income tax bracket would have been eliminated, making 15% the lowest tax bracket for individuals. The Tax Act 2010 extends the 10% bracket through 2012.
Temporarily extend the 25%, 28%, 33%, and 35% brackets – these brackets will also be extended through 2012. Otherwise, upon expiration, these rates would have moved to 28%, 31%, 36%, and 39.6%, respectively.
Temporarily repeal the Personal Exemption Phase-out – if not extended, the Personal Exemption Phase-out for taxpayers with AGI above a certain level would have returned for 2011 (it was repealed for 2010). The 2010 Tax Act extends the repeal through 2012.
Temporarily repeal the itemized deduction limitation – much like the Personal Exemption Phase-out, the AGI limit on itemized deductions was repealed for 2010 only (by EGTRRA), and Tax Act 2010 extends the repeal through 2012.
Temporarily extend the capital gains and dividend rates – unless the extension bill passed, the current capital gains and dividend tax rates (0% for those in tax brackets less than 25%, 15% for those in the 25% or higher brackets) would have reverted to the pre-EGTRRA rates of 10% and 20%, with dividends being taxed at ordinary income tax rates. The Tax Act 2010 extends the current rates (0% and 15%) through 2012.
Child Tax credit – without the extension, the Child Tax credit would have reduced back to $500, the pre-EGTRRA amount, from $1,000, after 2010. The Tax Act 2010 extends this provision through 2012.
AMT tax “patch” extension – annually, Congress votes to add a patch to the tax law, increasing the Alternative Minimum Tax exemption above the specific amount in the law, which is $33,750 for singles and $45,000 for married couples. The extension puts the “patch” in place for both 2010 and 2011, with the amounts indexed for inflation up to this year and next.
“Third-Child” Earned Income Tax Credit (EITC) – under current law, working families with two or more children currently qualify for an earned income tax credit equal to 40% of the family’s first $12,570 of earned income. The ARRA 2009 increased, for 2010 only, the earned income tax credit to 45% of the family’s first $12,570 of earned income for families with three or more children and increased the phaseout range for all married couples filing a joint return. The 2010 Tax Act extends these provisions for an additional two years, through 2012.
Marriage Penalty relief – the marriage penalty relief for the standard deduction, 15% tax bracket, and EITC would have expired at the end of 2010. The 2010 Tax Act extends this relief through 2012.
Temporarily extend the expanded dependent care credit – this expanded dependent care credit allows a taxpayer a credit for an applicable percentage of child care expenses for children under age 13, and disabled dependents. The EGTRRA increased the amount of eligible expenses from $2,400 for one child and $4,800 for two or more children to $3,000 and $6,000, respectively. This was set to expire in 2010, but the 2010 Tax Act extends these amounts through 2012.
Temporarily extend the increased adoption tax credit – EGTRRA increased the credit from $5,000 to $10,000, and provided an income exclusion of up to $10,000 for employer-assistance programs. The Patient Protection and Affordable Care Act of 2010 extended these benefits through 2011, and now the 2010 Tax Act extends these amounts through 2012.
Extension of deduction of state and local general sales taxes – the Tax Act 2010 extends through 2011 the election to take an itemized deduction for state and local sales taxes in lieu of the itemized deduction for state and local income taxes.
Estate and Gift Tax Provisions
Temporary estate tax relief – without this bill, the estate tax would have reverted to the pre-2001 level of 55% top tax rate and a $1 million exemption. The Tax Act 2010 reduces the top tax rate to 35% and imposes an exemption amount of $5 million – and $10 million for couples! This couple provision is new, as always in the past the exemption could only be used by each individual, so this is groundbreaking (more in the next paragraph). The new legislation allows that the rate and exemptions will be effective for all of 2010, although there are some options for estates that came into being during 2010 (to the date of the law’s passage). This also applies to the Generation Skipping Transfer Tax (GSTT).
Portability of exemption – this new provision works with the “couple” exemption mentioned above. This provision allows the total exemption amount of $10 million to be utilized by a combination of the two spouses that make up the couple, rather than specific amounts attached to each individual. This should reduce some of the complexity in estate planning for couples.
Reunification of gift tax and estate tax – beginning in 2011, gift tax and estate tax will re unified in their credit amounts and rates. This means that the lifetime exemption of $5,000,000 can be used for either gifts or bequests. The tax rate on gifts or bequests above the exemption is the same for either, 35%.
Temporary extension of Coverdell provisions – the extension will leave the current Coverdell provisions in place through 2012, instead of letting them expire at the end of 2010. This primarily leaves the annual contribution amount at $2,000 (instead of $500), and provides for the use of Coverdell funds for elementary and secondary school tuition, as has been the case since EGTRRA.
Temporary extension of above-the-line deduction for certain expenses of elementary and secondary school teachers – this extends the $250 above-the-line deduction through 2011 (and includes 2010).
Temporary extension of the above-the-line deduction for qualified education expenses – this deduction is extended for both 2010 and 2011.
Temporary extension of the expanded exclusion for employer-provided educational assistance – EGTRRA had the provision for excluding up to $5,250 from gross income per year for employer-provided educational assistance, through 2010. The Tax Act 2010 extends the provision through 2012.
Temporary extension of the expanded student loan interest deduction – this provision provides the ability to deduct, above-the-line, up to $2,500 in interest paid for student loans. The Tax Act 2010 extends this provision through 2012.
Extension of the American Opportunity Tax Credit – this credit, which replaced the old Hope credit, was created under ARRA, and allowed for a tax credit up to $2,500 for tuition and related expenses paid through 2010. The Tax Act 2010 extends the American Opportunity Tax Credit through 2012.
Other Important Provisions
Extension of charitable IRA contribution provision – without the extension bill, this provision would have expired in 2009. The Tax Act 2010 extends this provision for 2010 and 2011, allowing IRA owners age 70½ or older to make charitable contributions of up to $100,000 directly from their IRA – without having to recognize the distribution for tax purposes.
In addition to all of the above, there are quite a few business-owner-oriented tax provisions being extended and enhanced with this new law. Again, let me know if you need additional details.