Highlights of the Tax Relief Act of 2010

The following is a brief overview of the key tax changes affecting individuals and businesses in the recently enacted Tax Relief Act of 2010. Please call our offices for details of how the new changes may affect your specific situation.

Highlights of the Tax Relief Act of 2010:

- The current income tax rates will be retained 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.

- Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.

- A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT.

- Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law: 1) Extends the $1,000 child tax credit and maintains its expanded refundability for two years, 2) Extends rules expanding the earned income credit for larger families and married couples, and 3) Extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.

- Bonus first-year depreciation: -Increased to 100% (up from 50%), effective for new tangible personal property placed in service after September 8, 2010 and through December 31, 2011. -“New” means the original use of the property must commence with the taxpayer – used property does not qualify. -This supersedes bonus depreciation rules enacted under the Small Business Jobs Act of 2010 relating to the same placed-in-service period.  For 2012 the bonus depreciation reverts back to the 50% of the value of new tangible personal property placed in service during 2012.

- Section 179 Election to Expense New and Used Tangible Personal Property: - For 2010 and 2011 the amount of new or used peronal property purchased that can be expenses was raised to $500,000 on total purchases that do not exceed $2,000,000.  For 2012 the limit is expense limit is lowered to $125,000 on total purchases that do not exceed $500,000.

-Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include:

• 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;
• The $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and
• The research credit.

-After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.

We hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.