2010 Tax Relief Act
(Tax Relief, Unemployment Insurance Reauthorization,
and Job Creation Act of 2010)
On December 17, 2010, President Obama signed into law the 2010 Tax Relief Act also known as the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853)." This tax act extends the Bush-era tax cuts, favorable tax rates for long-term capital gains and qualified dividends, and provides a "patch" to the alternative minimum tax (AMT) for TWO years (2011 & 2012). It also provides significant estate tax relief and contains new tax breaks including 100% bonus depreciation for certain property, a 2% cut in Social Security tax paid by employees and self-employed persons in 2011 and extends several expired tax breaks like the deduction for sales tax in lieu of state and local income tax and the above-the-line deduction for teacher classroom expenses. Below are more details on the more popular aspects of the new tax law:
Individual Income Tax Rates Extended for TWO Years
For tax years 2011 and 2012, the income tax rates for individuals will continue to be 10%, 15%, 25%, 28%, 33% and 35%.
Prior to this tax act being passed, the rates were scheduled to increase to 15%, 28%, 31%, 36% and 39.6% effective January 1, 2011.
Reduced Capital Gains and Qualified Dividends Rate Extended for TWO Years
For tax year 2010, qualified capital gains and dividends are taxed at a maximum rate of 15% (0% for taxpayers in the 10% and 15% income tax brackets). These rates have been extended to years 2011 and 2012.
Prior to this tax act being passed, the maximum capital gain tax rate would have been 20% beginning January 1, 2011. If any of the capital gain would otherwise have been taxed at the 15% rate, then it would be taxed at 10%. In addition, any gain from the sale or exchange of property held for more than five years that would otherwise have been taxed at the 10% capital gain rate would be taxed at an 8% rate. Any gain from the sale or exchange of property acquired after year 2000 and held for more than five years, that would otherwise have been taxed at a 20% rate was to be taxed at an 18% rate. Dividends received by an individual would have been taxed at ordinary income tax rates, which meant as high as 39.6%!
Payroll - Social Security Tax Cut for Year 2011
The 2010 Tax Relief Act reduces the "employee-share" of the Social Security taxes from 6.2% to 4.2% for wages and other compensation paid in calendar year 2011 up to the taxable wage base of $106,800. Employers will continue to pay the 6.2% match for employees Social Security taxes.
Self-employed individuals would pay 10.4% instead of 12.4% towards Social Security taxes based on self-employment income up to $106,800.
Increased Standard Deduction for Married Filing Jointly Extended for TWO Years
The standard deduction for married taxpayers filing separately is one-half of the standard deduction for joint filers. The basic standard deduction for a married couple filing a joint return is twice the basic standard deduction for an unmarried individual filing a single return under current law. This has been extended to years 2011 and 2012.
Prior to this tax act being passed, the basic standard deduction for 2011 was projected to be $9,650 for married filing jointly; Now under the new law, it will be $11,600.
No Phase-Out on Personal Exemptions or Limitations on Itemized Deductions Extended for TWO Years
Before 2010, taxpayers with incomes over certain thresholds were subject to the personal exemption phase-out and to limitations on itemized deductions. For tax year 2010, there are no phase-outs or limitations. This has been extended to tax years 2011 and 2012.
Expanded Child Tax Credit Extended for TWO Years
For tax year 2010, taxpayers are able to claim a maximum $1,000 child tax credit for each qualifying child under age 17 that the taxpayer can claim as a dependent. The child tax credit can offset both the regular income tax and Alternative Minimum Tax (AMT). This has been extended to tax years 2011 and 2012.
Prior to this tax act being passed, the maximum credit was to drop from $1,000 to $500, and the credit was not to be allowed against AMT.
Enhanced Earned Income Credit Extended for TWO Years
The Earned Income Credit has been modified significantly since year 2001. Legislation temporarily increased the beginning and end points of the earned income credit (EIC), increased the credit for three or more children and made other positive changes. The laws also simplified the definition of earned income, eliminated the rule that reduced a taxpayer’s EIC by the amount of AMT liability, redefined the relationship test, and modified the tie-breaker rules. All these enhancements were subject to expire as of December 31, 2010. The 2010 Tax Relief Act extends the enhanced EIC to tax years 2011 and 2012.
Expanded Child and Dependent Care Credit Extended TWO Years
The 2010 tax act keeps the eligible expenses for child and dependent care up to $3,000 for one qualifying individual ($6,000 for two or more qualifying individuals). Also, the maximum credit will remain at 35%. The 2010 Tax Relief Act extends these provisions to tax years 2011 and 2012.
Prior to this tax act being passed, for tax years beginning after December 31, 2010, the amount of eligible expenses for child and dependent care was to drop from $3,000 to $2,400 for one qualifying individual ($6,000 to $4,800 for two or more qualifying individuals).
Mortgage Insurance Premium Deduction Extended for ONE Year
Under current law, taxpayers may deduct certain premiums paid for qualified mortgage insurance during the tax year in connection with acquisition indebtedness on a qualified residence until December 31, 2010. The 2010 Tax Relief Act extends the deduction for one year to December 31, 2011 subject to some limitations.
Tax Breaks for Individuals Retroactively Reinstated and Extended for Tax Years 2010 and 2011
All of the following tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011:
The itemized deduction for state and local general sales and use tax in lieu of deducting state and local income taxes,
The above-the-line deduction of up to $250 for teacher classroom expenses,
The above-the-line deduction for qualified tuition and fees expenses,
The provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year,
Increased contribution limits and carryforward period for contributions of appreciated real property for conservation purposes,
Look-thru of certain RIC stock in determining gross estate of nonresidents, and
Disregard of refunds in the administration of federal or federally assisted benefit programs.
American Opportunity Tax Credit Extended for TWO Years
The 2009 Recovery Act enhanced and renamed the Hope education credit as the American Opportunity Tax Credit for tax years 2009 and 2010. The 2010 Tax Relief Act extends the American Opportunity Tax Credit to years 2011 and 2012.
Student Loan Interest Deduction 60 Month Rule and Expanded Income Range Phase-Out Extended for TWO Years
The 2010 Tax Relief Act extends for two years (2011 & 2012) the waiver of the 60-month rule to deduct up to $2,500 in student loan interest and also keeps the expanded modified adjusted gross income range for phase-out.
Educational Assistance Exclusion Extended for TWO Years
The allowance for employees to exclude up to $5,250 in employer-provided education assistance annually from income and employment taxes and for employers to deduct up to $5,250 was scheduled to expire at the end of year 2010. The 2010 Tax Relief Act extends these provisions to tax years 2011 and 2012.
Bonus Depreciation Extended; Temporary 100% Depreciation Deduction Allowance for First-Year Placed in Service
The 2010 Tax Relief Act boosts the 50% bonus depreciation to 100% for qualified property placed in service AFTER September 8, 2010 and BEFORE January 1, 2012. The 2010 Tax Act also makes the 50% bonus depreciation available for qualified property placed in service in calendar year 2012.
Nonbusiness Energy Credit Extended ONE Year Through 2011
The nonbusiness energy credit is designed to reward individuals who make certain energy efficient home improvements to their primary residence with a tax benefit. Under current law, the nonrefundable credit amount is 30% of the total amount of expenses for qualified energy efficient improvements for property placed in service in years 2009 and 2010. The credit under current law is limited to a lifetime maximum credit of $1,500 for 2009 and 2010.
The 2010 Tax Relief Act extends the nonbusiness energy credit to year 2011. However, the allowable credit and dollar maximum reverts to the laws that were in effect prior to year 2009. Therefore, the lifetime limit AFTER year 2005 is $500.
Estate Tax Revived for 2010 and Future Years
Prior to the new tax law, the federal estate tax was repealed for year 2010. The new law revives the federal estate tax and generation-skipping transfer tax for 2010. However, the exclusion amount has been increased and tax rate lowered. The exclusion amount for estates is $5,000,000 and the maximum estate tax rate is 35%. The 2010 Tax Relief Act gives estates of decedents dying in calendar year 2010, the option to elect not to come under the revived estate tax. The new law gives those estates the option to elect to apply:
The estate tax based on the new 35% top rate and $5,000,000 applicable exclusion amount, with stepped-up basis, OR
No estate tax and modified carryover basis rules.
Some Other Tax Law Changes
Alternative minimum tax (AMT) exemption amounts increased for tax years 2010 and 2011
Expanded Adoption Credit and Employer-Provided Adoption Assistance Extended One Year
Expanded Employer-Provided Child Care Tax Credit Extended Through 2012
Personal Nonrefundable Credits May Offset AMT and Regular Tax for 2010 and 2011
Increased the Section 179 Expense Deduction for Year 2012
Disaster Relief Incentives
Energy Incentives for Individuals and Businesses
View the Entire Tax Act Passed By Congress and Signed Into Law