New Tax Laws

Congress has provided us with some much needed certainty, at least for the moment. The billlocks in the current marginal tax rates for all income levels. The measure also sets new parameters for the estate tax, creates a raft of other individual and business tax breaks, and extends unemployment benefits. While the $858 billion bill offers a measure of relief, it may be only temporary. Most of the measure’s provisions will expire in 2012 unless they are renewed again. The following is a summary…

Individual Tax Extenders & Incentives

– Estate Tax Compromise – The Tax Relief Act revives the estate tax for decedents dying after December 31, 2009. The maximum estate rate will be 35 percent with an exclusion of $5 million (per person) and is scheduled to sunset on December 31, 2012;

-Gift Tax – For gifts made this year, the gift tax is computed using a new schedule with a top tax rate of 35 percent and a maximum exclusion amount of $1 million. For gifts made after 2010, the gift tax will match the estate tax with a top gift tax of 35% and a maximum exclusion amount of $5 million;

-Alternative Minimum Tax (AMT) Patch – The 2010 Tax Relief Act provides a two year patch intended to prevent the AMT from encroaching on middle income taxpayers by providing high exemption amounts for 2010 and 2011.

-Individual Tax Rates -The 2010 Tax Relief Act extends all individual rates at 10, 15, 25, 28, 33 and 35 percent for two years through December 31, 2012.

-Payroll Tax Cut – Employees’ payroll tax (FICA) will be cut from 6.2% to 4.2% for wages earned in the 2011 calendar year up to $106,800 in earnings. Self-employed individuals would pay 10.4 percent on self-employment income to the threshold.

-Capital Gains/Dividends – Qualified capital gains and dividends are currently taxed at a maximum of 15 percent for 2010. The 2010 Tax Relief Act continues this treatment for two years through December 31, 2012.

-Itemized Deduction Limitation – The “Pease” limitation reduces the total amount of a higher-income individual’s otherwise allowable deductions. Due to expire at the end of the year, the Tax Relief Act extended it through December 31, 2012.

-Personal Exemption Phase-out – Prior to 2010, individual taxpayers with incomes over certain amounts were subject to the personal exemption phase-out (PEP). The PEP reduces the total amount of exemptions that may be claimed by 2 percent for each $2,500 by which the taxpayer’s income exceeded the applicable threshold. The PEP has been extended for two years through December 31, 2012.

Business Tax Extenders & Incentives

-100% Bonus Depreciation – The Tax Relief Act increases the 50% bonus depreciation to 100% for qualified equipment, software and intangible property investments made after September 8, 2010 and before January 1, 2011. 50% bonus depreciation will be allowed after December 31, 2011 and before January 1, 2013.

-Section 179 Expensing – The Small Business Jobs Act increased the Section 179 dollar/investments limits to $500,000/$2M for 2010 and 2011. The Tax Relief Act provides for a $125,000 dollar limit (indexed for inflation) and a $200,000 investment limit (indexed for inflation) for tax years beginning in 2012.

-Research Tax Credit – The Research Tax Credit originally expired at the end of 2009. The Tax Relief Act renews this credit for a period of two years through December 31, 2011. It is retroactive for 2010 and is effective for amounts paid after December 31, 2009.