Highlights of the 2010 Tax Relief Act

Individuals-The new law provides a two-year extension of existing individual income tax rates (currently 10, 15, 25, 28, 33, and 35 percent) through 2012. The marriage penalty provisions were also extended, as were the repeals of the itemized deductions limitation and the personal exemption phaseout. For 2011 wage earners will find their Social Security tax reduced from 6.2 to 4.2 percent, up to the taxable wage base of $106,800. Self-employed individuals similarly benefit. And as in prior years, Congress has enacted an "AMT patch” for 2010, increasing the exemptions by a bit over the 2009 levels. For retirees, the Relief Act also permits direct charitable contributions of IRA proceeds.

Capital gains/dividends. The new law extends the reduced capital gains and dividend tax rates through 2012. Individuals in the 10 and 15 percent rate brackets will enjoy a zero percent capital gains and dividend tax rate. Rather than the 20 or 39.6 percent rates previously scheduled, such income of higher-bracket individuals be subject to a 15% maximum rate.

Bonus depreciation. To encourage investment, bonus depreciation permits businesses to immediately write off a percentage of the cost of investments, faster than under ordinary tax depreciation schedules. The new law allows 100 percent bonus depreciation for qualified investments after September 8, 2010 before 2012. It also continues 50 percent bonus depreciation on property placed in service in 2012. The new law also provides for enhanced Code Sec. 179 expensing for 2012, with a $125,000 dollar limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) for tax years beginning in 2012. Under current law for 2010 and 2011, the Code Sec. 179 deduction and investment limits are $500,000 and $2 million, respectively.

Estate and Gift Taxes- In 2001 Congress provided for the gradual reduction of the estate tax until its repeal in 2010. Congress simultaneously provided that the pre-2001 estate tax (55 percent tax rate and $1 million exclusion) was to return in 2011. Despite pleas for guidance for years, Congress left Americans in the dark, failing to provide any guidance for planning until the harsh pre-2001 Estate Tax was on the verge of becoming effective. Thankfully, the new law provides guidance for 2010 (the year without tax) through 2012. For decedents dying in 2011 and 2012, the new law reduces the estate tax rate to 35 percent and increases the estate and gift exclusion to $5 million. For 2010 estates can elect whether to apply the estate tax at the 35 percent/$5 million levels, or to avoid tax but utilize a carryover basis regime. The new law also allows "portability” between spouses of any unused exclusion.