Key Provisions in the New Tax Act

The recent tax law—the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010—provides a wide array of tax breaks for individuals, businesses and estates, in addition to extending unemployment benefits. Here’s a brief summary of the key tax provisions in the new law.

Income tax rates: The 2010 tax law preserves the current income tax structure through 2012. Without this extension, the bottom 10% rate would have been eliminated, and the two top rates of 33% and 35% would have increased to 36% and 39.6%, respectively. The new law also incorporates relief from the “marriage penalty” affecting joint filers.

Capital gains and dividends: The “Bush tax cuts” are extended through 2012. Under the 2010 tax law, long-term capital gains and qualified dividends will continue to be taxed at a maximum tax rate of 15% (zero percent for lower-income individuals). Without this extension, the maximum tax rate for long-term capital gains would have increased to 20% (10% for lower-income individuals), while qualified dividends would have been taxed at ordinary income rates.

Payroll tax holiday: The 2010 bill authorizes a one-year “payroll tax holiday” for workers. For 2011 only, the employee’s share of the 6.2% Social Security tax is reduced by 2% for wages received up to the annual wage base of $106,800. A comparable 2% cut for Social Security tax is available to self-employed individuals in 2011.

Alternative minimum tax: The alternative minimum tax (AMT) is determined by a complex calculation involving certain tax preferences, adjustments and an exemption amount based on filing status. The new tax law bumps up the AMT exemption amounts for 2010 and 2011, instead of the scheduled return to pre-2001 levels.

Itemized deductions and personal exemptions:Under prior law, deductions for itemized deductions and personal exemptions were phased out for certain high-income taxpayers. The phaseout rules were repealed for 2010 but were scheduled to return in 2011. Now the new tax law extends the repeal of the phaseout rules for itemized deductions and personal exemptions through 2012.

Section 179 deduction: Under the 2010 small-business law (the Small Business Jobs Act of 2010), the maximum Section 179 deduction was doubled from $250,000 to $500,000 for qualified business property placed in service during tax years beginning in 2010 and 2011. The phaseout threshold was also increased from $800,000 to $2 million. The new tax law provides a $125,000 maximum deduction and $500,000 phaseout threshold for tax years beginning in 2012 instead of dropping to $25,000 and $200,000, respectively.

Bonus depreciation: The 2010 small-business law also reinstated 50% “bonus depreciation” for qualified property placed in service through 2010 (through 2011 for certain other property). Thanks to the new tax law, your business can claim 100% bonus depreciation deduction for qualified property placed in service before 2012 (before 2013 for certain other property); and 50% bonus depreciation for qualified property placed in service in 2012.

Qualified small business stock: Under prior law, an investor could exclude a maximum of 50% of the gain from the sale of “qualified small business stock” (QSBS) held more than five years. The maximum exclusion was temporarily increased to 75%. Now the new tax law authorizes a maximum 100% exclusion for QSBS acquired before January 1, 2012.

Higher education credit: The enhanced American Opportunity Tax Credit (AOTC), which was scheduled to expire after 2010, is extended through 2012. The maximum annual credit of $2,500 is available for four years of postsecondary school study. However, the AOTC is phased out for certain high-income taxpayers.

Child tax credit: The new tax law extends the enhanced child tax credit through 2012. It was scheduled to expire after 2010. Without the new law changes, the $1,000 credit would have dropped to $500 per qualified child.

Adoption credit: The new tax law extends the credit for qualified adoption expenses through 2012 (but without enhancements included in the 2010 health care legislation). The maximum credit amount for 2011 and 2012 is $12,170. Without the new law changes, the maximum credit would have dropped to $5,000. However, the credit is phased out for certain high-income taxpayers.

Residential energy credits: Under prior law, you could claim a 30% residential energy credit (increased from 10%) for qualified energy-saving improvements in the home. The maximum credit for 2009 and 2010 combined was $1,500. The credit was set to expire after 2010. The new tax law allows a 10% residential energy credit through 2011 with certain other modifications.

Estate-tax relief: The estate rules have been completely revamped. The new tax law revisions generally apply through 2012. Beginning in 2011, estates may benefit from a $5 million exemption, a top tax rate of 35%, repeal of modified “carryover basis” rules and unification of the estate- and gift-tax systems. In addition, the estate-tax exemptions will be “portable” between spouses for decedents dying in 2011 or 2012. The new law also includes comparable changes for the “generation-skipping tax” affecting most transfers to grandchildren.

Note that the one-year repeal from federal estate tax still applies to decedents dying in 2010. However, an executor can choose to use the new rules taking effect in 2011 for a decedent who died in 2010 if it suits the family’s needs. Obtain professional guidance.

Reminder: This is only an overview of the main tax provisions in the new tax law. This publication will provide more information on these and other tax breaks in upcoming issues.