The Lame Duck session of Congress is cutting it a bit close but it looks like they finally agreed and in matter of hours or days from this posting will have passed a 2 year extension to the EGTRRA Tax Cuts or more commonly referred to as the Bush Tax Cuts of 2001. Thus, all of the following favorable tax rules will remain in place through 2012:
1. The income tax rates for individuals stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%).
2. The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at twice that of the standard deduction for single taxpayers.
3. Long-term capital gains will continue to be taxed at a maximum rate of 15% instead of increasing to 20%.
4. Qualified dividends paid to individuals will be taxed at the same capital gain rates instead of being taxed at ordinary income rates.
5. The AMT exemption amounts for 2010 will be $72,450 for married individuals, $47,450 for single individuals, and $36,225 for married filing separate.
6. The AMT exemption amounts for 2011 will be $74,450 for married individuals, $48,450 for single individuals, and $37,225 for married filing separate.
7. The estate tax exemption will be at $5 million per person and $10 million per couple and the top tax rate will be 35% through 2012. The exemption amount will be indexed beginning in 2012. The changes will be effective January 1, 2010, but executors will be allowed to make an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011.Effective for estates of decedents dying after December 31, 2010, the 2010 Reform Act will allow the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse.
Many tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011, including:
1. $250 above-the-line deduction for certain expenses of elementary and secondary school teachers.
2. Election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes.
3. Increased contribution limits and carry forward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.
4. Above-the-line deduction for qualified tuition and related expenses.
5. 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 (additionally, individuals will be allowed to make charitable transfers during January of 2011 and treat them as if made during 2010).
In addition, the 2010 Tax Reform Act will extend for an additional year (i.e., through 2011), the rule allowing premiums for mortgage insurance to be deductible as interest that is qualified residence interest.
The bill OKs the following major new incentives for businesses to invest in machinery and equipment:
1. A 100% bonus first-year depreciation allowance under Code Sec. 168(k) for property acquired and placed in service after September 8, 2010, and before January 1, 2012.
2. A 50% bonus first-year depreciation allowance under Code Sec. 168(k) for property placed in service after December 31, 2011, and before January 1, 2013.
3. For tax years beginning after December 31, 2011, setting the maximum expensing amount under Code Sec. 179 at $125,000 and the investment-based phase-out amount at $500,000 (in 2010 the expensing amount is $500,000 and the investment-based phase-out is at $2 million).
4. The 2010 Tax Reform Act provides a payroll/self-employment tax holiday during 2011 of two percentage points. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.