On December 9, 2010, Senate Majority Leader Harry Reid (D-NV) introduced The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
There are provisions in the tax act that are the result of a compromise between President Obama, Democratic Senators and Republican Leaders of the House and Senate. President Obama announced the compromise earlier last week and indicated that it was important to the economy to resolve the differences in the party. The Senate opened debate on the bill on Friday, Dec. 10. Both the House and Senate could pass the bill within the next week. Most commentators suggest that the tax cuts and unemployment benefits are sufficient for enactment of the Senate bill this month.
The tax act includes many provisions that affect individual income taxes, business and corporate taxes and the estate tax. Most tax provisions will be extended for two years.
1. Tax Brackets – The existing 10%, 25%, 28%, 33% and 35% tax brackets will be extended for two years.
2. Personal Exemption and Itemized Deduction Limits – The phaseout of personal exemptions for higher-income tax payers will be repealed for two years. Similarly, the limit on itemized deductions for higher-income tax payers will not apply for two years.
3. Capital Gains Tax – For individuals in the 10% and 25% income tax bracket, there is a 0% capital gains tax rate. Those individuals in the 28%, 33% and 35% bracket pay a 15% tax on long-term capital gains for the next two years.
4. Child Credit – The $1,000 per child credit is extended for 2011 and 2012.
5. Family Benefits – The dependent care credit, the adoption tax credit, the adoption assistance program and the employer credit for child care are all extended.
6. Earned Income Tax Credit (EITC) – The EITC had been expanded for 2010 to 45% of the first $12,570 for families with three or more children. This is also extended for 2011 and 2012.
7. Education Incentives – Coverdell education savings accounts, employer-provided educational assistance, expanded student loan interest deductions and the American Opportunity Tax Credit are extended for two years.
8. Alternative Minimum Tax (AMT) – The 2010 exemption under AMT is adjusted to $72,450 for couples and $47,450 for single persons.
9. Estate Taxes – The estate exemption is increased to $5 million per person with a top estate tax rate of 35% and marital deduction portability.
10. Business Benefits – Corporations that acquire property between September 8, 2010 and the end of 2011 will be permitted a 100% bonus depreciation.
11. Payroll Taxes – The 2010 payroll tax is 6.2% for the employee and 6.2% for the employer for a total of 12.4%. In 2011 this is reduced to 4.2% for the employee and 6.2% for the employer, for a total rate of 10.4%.
12. Tax Extenders – The traditional tax extenders such as the $250 classroom supplies deduction for teachers, the deduction of state and local taxes, the IRA charitable rollover and other similar provisions are effective for 2010 and 2011.