Highlights of the New Tax Bill (Part 1)

Congress and President Obama Agree on New 2010 Tax Bill

On December 16, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (“the Tax Relief Act of 2010”), which not only extended many favorable tax provisions, but also extended (or, in some cases, reinstated) many other tax benefits until January 1, 2013 (subject to certain modifications noted below). President Obama is expected to sign the bill within the next few days. This Alert highlights some of the more noteworthy provisions of the Tax Relief Act of 2010.

FAVORABLE TAX PROVISONS AFFECTING INDIVIDUALS

EGTRRA’s 2010 Tax Rates and Certain Other Tax Breaks Extended Through 2012 –

1. The tax rates for individuals in effect in 2010 will remain in effect through 2012. Accordingly, for 2011 and 2012, the lowest marginal tax rate will remain at 10%. And, for those same years, the top marginal tax rate will remain at 35%.
2. The phase-out of Itemized Deductions and Personal Exemptions of higher-income taxpayers, which was set to occur in 2011, will not be effective for 2011 and 2012.
3. The special maximum tax rate of 15% on long-term capital gains and “qualified dividends” will be retained for 2011 and 2012.
4. For 2011 and 2012, qualifying taxpayers will still be able to claim a Child Tax Credit of up to $1,000 for each qualifying child under age 17. The Credit for Household and Dependent Care of up to $2,100 for the care of two or more children under the age of 13 will also continue to be available.
5. The American Opportunity Tax Credit (“AOTC”) will be retained for 2011 and 2012. Therefore, the maximum AOTC of $2,500 per eligible student per year is retained subject to being phased out for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).

Social Security Payroll Tax Credit – Also, for 2011 only:

1. The employee’s share of Social Security Taxes is reduced from 6.2% to 4.2% of their pay, up to the Social Security Wage Base ($106,800 for 2011). So, for an individual who has wages of at least $106,800 in 2011, the tax savings for 2011 attributable to the reduced rate of withholding is 2% of $106,800, or $2,136.
2. The Social Security tax component of a self-employed individual’s self-employment tax is reduced from 12.4% to 10.4%.

Alternative Minimum Tax (“AMT”) Patch – A two year patch for 2010 and 2011 will increase the AMT exemption amount to $47,450 for single taxpayers and to $72,450 for married taxpayers filing jointly for 2011 and to $48,450 for single taxpayers and to $74,450 for married taxpayers filing jointly for 2012. Without the patch, the House Ways and Means Committee estimated that approximately 21 million additional taxpayers would owe AMT for 2010.

Long List of Tax Breaks For Individuals Retroactively Reinstated and Extended Through 2011 – Many tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated for 2010 and extended through 2011, including the following:

1. The $250 above-the-line deduction for certain class room expenses of elementary and secondary school teachers;
2. The election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction for State and local income taxes;
3. The above-the-line deduction for qualified tuition and related expenses (in lieu of the AOTC); and
4. The provision that permits up to $100,000 per year of tax-free distributions to a charity from the IRA of an individual age 70 1/2 or older.

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UHY LLP is a licensed independent CPA firm that performs attest services.

UHY Advisors, Inc. and UHY LLP are independent U.S. members of Urbach Hacker Young International Limited.

This article was written by Gary Field, CPA at Numerico, PC. Click here to view Numerico’s website.