The President�s Tax Deal: What�s In It for Americans?
Last month, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This act put to rest many questions about how Congress and the President would handle the scheduled expiration of the Bush tax cuts this year, as well as other pressing issues of taxation and spending, such as unemployment insurance and the continuation of certain tax credits and opportunities. But what does the new tax act mean for Americans?
For Individuals The act has a definitive centerpiece: the two-year extension of the Bush tax cuts for all Americans. President Obama and Congress decided to extend the tax rates at all income levels for two years, meaning that tax rates in 2011 will remain where they were in 2010 for income, capital gains, etc., and Congress will revisit the issue in 2012. Specifically, income taxes will continue to have a top rate of 35%, while capital gains and qualified dividends will continue to be taxed at 15%.
Another significant piece of the legislation is an extension of unemployment benefits for an additional 13 months in order to help those who have been unemployed for the previous limit of 99 weeks.
Also helpful for many Americans is a cut in the employee share of Social Security Tax from 6.2% to 4.2%. Self-employed individuals will pay a combined rate of 13.3%, down from 15.3%. This cut is expected to be very helpful in putting money directly into the pockets of American consumers and inject billions into the economy.
The estate, gift, and generation-skipping transfer tax rates will also be getting a significant revision under this act. The exemption for all has been raised to $5 million, and the maximum rate for all has been reduced to 35% for 2010, 2011 and 2012.
The act also extends a great number of tax incentives that were set to expire or revert to higher rates at the end of the year. Among these are the:
• The American Opportunity Tax Credit for qualifying higher education expenses;
• Child Care Credit for employers providing health care to their employees’ children;
• Adoption Credit for individuals adopting children;
• Earned Income Credit for qualifying taxpayers with three or more children;
• Dependent Care Credit for those with children under age 13 or incapacitated dependents/spouses;
• Marriage Penalty relief in the form of an increased standard deduction and a larger tax bracket;
• The Child Tax Credit will remain at $1000 per child, rather than reverting to $500 per child, through the end of 2012.
In addition, certain tax incentives that expired at the end of 2009 will be extended retroactively to the end of 2010 for the purposes of 2010 filing. These include:
• Charity contribution of IRA proceeds;
• Charity contribution of appreciated conservation property;
• Mortgage insurance premium deduction;
• State and local sales tax deduction;
• Higher education tuition deduction;
• Teacher classroom-expense deduction.
Finally, the act creates a patch for the Alternative Minimum Tax, both retroactively for 2010 and extended through 2011, which will prevent roughly 20 million Americans from having to pay AMT.
For Businesses One of the boldest business tax provisions in the bill is an increase in bonus depreciation from 50% to 100% for acquisitions of qualified trade or business property made between September 9, 2010 and the end of 2011. In addition, the act further extends a 50% depreciation for such property and equipment put into service in 2012. This provision is designed to spur investment that will help contractors and related businesses purchase and utilize equipment that will help them grow their businesses.
The bonus depreciation provision only applies to new property. However, another provision receiving an extension, Section 179 Expensing, can be used for new or used property. The Small Business Jobs Act passed in September raised 179’s expense and investment limits for 2010 and 2011 to $500,000 and $2 million, respectively. The new act will provide raised limits on 179 Expensing from 2012 onward, although at a much lower (and less advantageous) rate of $25,000 and $200,000.
Furthermore, the 100% exclusion on gains from the sale of small-business qualified stock has been extended through the end of 2012.
The Research and Development Credit, scheduled to be terminated at the end of 2009, has been revived through the end of 2011, and, what’s more, will be applicable for 2010 as well. A variety of other credits and deductions were granted extension to the end of 2011. Among them:
• Certain charitable donations related to contribution of food and educational items;
• $230 employer-provided transit benefits;
• New Markets Credit for new equipment used for low-income community development;
• Wage credit for active-duty employees;
• Five-year write-off for farm equipment;
• Work Opportunity Tax Credit for employers who hire individuals from one of 12 targeted groups.
The act is a hefty piece of legislation, to be sure. The good news is that there are plenty of opportunities for construction companies and individuals nationwide to take advantage of the opportunities it offers. Call your financial adviser for further advice on which provisions will help you and how you can claim them.
What Is the Act? The Act centers on a temporary, two-year reprieve from the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, together known as the Bush tax cuts.
Income taxes would have returned to Clinton administration-era rates in 2011 had Congress not passed this law. The act also extends some provisions from the 2009 stimulus bill.
The act includes several other tax- and economy-related measures intended to have a new stimulatory effect, mostly notably an extension of unemployment benefits and a one-year reduction in the FICA payroll tax, as part of a compromise agreement between Obama and Congressional Republicans. Its overall monetary impact has been placed at $858 billion.