The 2010 Tax Relief Act Highlights for IndividualsJanuary 27, 2011
On December 17, 2010 President Obama signed into law a multi-billion dollar tax cut package – the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “2010 TRA”). The 2010 TRA extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years. The bill also provides for an AMT “patch,” a one-year payroll tax cut, 100 percent bonus depreciation through 2011 and 50 percent bonus depreciation for 2012, and extends various energy credits, among other provisions.
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, the provisions are temporary and the ultimate fate of the Bush-era tax cuts is deferred until after 2012, a presidential election year. For most individuals, the most immediate impact of the new law will be the payroll tax cut and the extension of the reduced personal income tax rates.
Individual Tax Rates
The 2010 TRA extends through December 31, 2012 all individual rates. An estimate of the 2011 tax brackets:
Tax Rate Single Persons Taxable Income Married Filing Joint Taxable Income
10% Under $8,500 Under $17,000
15% $8,501 to $34,500 $17,001 to $69,000
25% $34,501 to $83,600 $69,001 to $139,350
28% $83,601 to $174,400 $139,351 to $212,300
33% $174,401 to $379,150 $212,301 to $379,150
35% Over $379,150 Over $379,150
Combined with the payroll tax cut discussed below, the extension of the individual rate cuts will give many individuals a significant increase in immediate dollars available to them in 2011 over what would have resulted without a tax bill.
Qualified capital gains and qualified dividends are taxed at a maximum rate of 15%, with a 0% rate for taxpayers in the 10 and 15% income tax brackets for 2010. The 2010 TRA continues this treatment for two years through December 31, 2012. Without the 2010 TRA, the maximum rate on net capital gains had been scheduled to rise to 20% in 2011, and the rate on qualified dividends also would have risen from 15% to the tax rates on regular income that threatened to reach as high as 39.6%. The 2010 TRA also extends the 100% exclusion of gain realized from qualified small business stock held for more than five years.
Qualified dividends, which continue to be eligible for the reduced tax rates, are dividends received from a domestic corporation or a qualified foreign corporation, on which the underlying stock is held for at least 61 days within a specified 121 day period.
Itemized Deduction Limitation
The “Pease” limitation (named after the member of Congress who sponsored the bill enacting it) has in recent years caused a “phase-out” of itemized deductions for higher-income individuals on expenses like property taxes, home mortgage interest and charitable contributions. The Pease limitation was repealed during 2010, but was scheduled to reappear in 2011. The 2010 TRA extends full repeal of the Pease limitation for two more years, through December 31, 2012.
Personal Exemption Phaseout
Before 2010, taxpayers with incomes over certain thresholds were subject to the personal exemption phaseout (PEP). The PEP reduced the total amount of exemptions that may be claimed where the taxpayer’s adjusted gross income exceeded certain limits, projected for 2011 to start at $169,550 for singles and $254,350 for joint filers. The 2010 TRA extends repeal of the PEP for two years, through December 31, 2012.
The Joint Committee on Taxation estimates that higher-income taxpayers will save over $20 billion from the combined itemized deduction and personal exemption provisions in the new law.
Alternative Minimum Tax
The 2010 TRA provides an AMT “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, which had expired at the end of 2009, an estimated 21 million additional households would be subject to the AMT.
Payroll Tax Cut
The 2010 TRA reduces the employee-share of the FICA portion of Social Security taxes from 6.2% to 4.2% for wages earned during the payroll tax holiday period (calendar year 2011) up to the taxable wage base of $106,800.
Self-employed individuals will pay 10.4% on self-employment income up to the threshold. The new payroll tax holiday period is estimated to inject over $110 billion into the economy in 2011. The 2% FICA reduction is available to all wage earners, with no phase out limit irrespective of income level. Thus, individuals earning at or above the FICA cap of $106,800 will receive a $2,136 tax benefit in 2011.
Self-employed individuals under the Tax Relief Act would calculate the deduction for employment taxes without regard to the temporary rate reduction (that is, one-half of 15.3 % of self-employment income). However, the 2010 TRA provides an enhanced percentage representing the employer portion of the deduction.