Congress has approved, and President Obama has signed into law, a multi-billion dollar tax cut package, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) (H.R. 4853). The new law follows through on the framework agreed to December 6 by President Obama and GOP leaders in Congress.

For most individuals, the most immediate impact of the new law will be the payroll tax cut and the extension of the reduced individual income tax rates. Below are some highlights:

• The 2010 Tax Relief Act reduces the employee-share of the OASDI portion of Social Security taxes from 6.2% to 4.2% for wages earned in calendar year 2011 up to the taxable wage base of $106,800. Self-employed individuals would pay 10.4% on self-employment income up to the threshold.
• Current income tax rates will remain in place for two years (2011 and 2012) with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
• The 2010 Tax Relief Act boosts 50% bonus depreciation to 100 percent for qualified investments made after September 8, 2010 and before January 1, 2012. Unlike Code Section 179 expensing, it is not limited to use by smaller businesses or capped at a certain dollar level. It also makes 50% bonus depreciation available for qualified property placed in service after December 31, 2011 and before January 1, 2013.
• The 2010 Tax Relief Act extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years.
• The bill provides an Alternative Minimum Tax “patch” intended to prevent the AMT from encroaching on middle income taxpayers by providing higher exemption amounts and other targeted relief for 2010 and 2011. Without this patch, an estimated 21 million additional households would be subject to the AMT.
• The bill offers an extension of the $1,000 child tax credit for two years, through December 21, 2012. The qualifying child must be under age 17 at the close of the year and satisfy relationship, residency, support, citizenship and dependent tests. It continues to be phased out for taxpayers with adjusted gross income in excess of $110,000 for joint filers.
• The bill extends a number of individual credits including adoption, dependent care, education and qualified energy efficiency improvement credits.
• The bill also extends a number of deductions for individuals including state and local sales tax, higher education tuition, teachers’ classroom expense and specific charitable donations.
• The Act extends a number of business tax extenders generally for two years. These business tax extenders had expired at the end of 2009.

The new law gives taxpayers some certainty in tax planning for the next two years, especially concerning the individual income tax rates, capital gains/dividend tax rates and the estate tax; however, these provisions are temporary.

With questions or to schedule a consultation with one of our tax specialists to discuss how the new law may impact you specifically, please contact Simons Bitzer at (317) 782-3070.