Important Changes With the Tax Relief Act of 2010

March 7, 2011 | By: TaxCure Staff

tax-relief-act-2010At the end of 2010, Congress passed a bill called the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” that will help many Americans during the 2011 and 2012 tax years. Many of the provisions of the bill are extensions from Bush Era tax credits, while others are brand new.

The question is: are you aware of the new Tax Relief Bill of 2010 and how it affects you and your tax liability? There are numerous benefits to the bill.

Here are a few components of the bill that may help you:

Income Bracket Changes, the Itemized Deduction & Pease Limitation

Through 2012 and with this legislation, the 10% bracket was kept in place, along with the 25, 28, 33, and 35% tax brackets. Furthermore, it eliminated the Pease Limitation (which lowered itemized deductions by 3% of income above a threshold amount, with a maximum deduction of up to 80% in itemized deductions), which eliminated the itemized deduction limitation. Lastly, the personal exemption phase-out was also eliminated for another 2 years.

Capital Gains and Dividend Rates

Capital Gains and Dividend Tax Rates would have been raised if the legislation was not passed for 2011 and 2012. As a result of passage, capital gains and dividends are not taxed for individuals in the 15% and 10% tax brackets. Moreover, individuals in the higher brackets pay only 15% on capital gains (long term) and 15% on qualified dividends (with some limitations). Ordinary dividends will continue to be taxed at the taxpayer’s normal income tax rate, with collectibles being taxed at 28% (if held a year or longer).

2% Payroll Tax Cut

For the 2011 tax year, the new bill means a payroll tax cut of 2% for most working Americans. Those married couples making less than $40,000 (individuals making less than $20k) will end up with less since the Making Work Pay Tax Credit expired. In either case, you should already be seeing the benefits of this provision in your paycheck if you make more than the aforementioned. The 2% deduction should provide over $100 bill in relief to about 155 million taxpayers. On average, families will receive approximately $1,000 extra in their paychecks over the course of the 2011 tax year.

American Opportunity Tax Credit

Formerly known as the Hope Credit, this credit benefited about $12.5 million (students and families) and in 2009 with an average $1,700 tax credit. With the cost of college tuition and expenses being so high, this credit gives some relief and allows for up to a $2,500 tax credit for students and their families. For many students, this will help offset any tuition hikes for the year, that many may not have been able to afford otherwise. It does start to phase out when a taxpayer has MAGI of more than $80,000 ($160,000 if married). This credit was extended through the 2012 tax year.

Earned Income Tax Credit

The tax relief bill also has extended the Earned Income Tax Credit’s amount for families of three or more children and increased the starting point of the income phase-out range through the 2012 tax year. The credit mainly benefits low-wage taxpayers with children. For 2010, the credit limit is $5,665.50 for a family with three or more children and $457 for couples with no qualifying child. There is an income limitation on claiming this credit and it starts to phase out at $40,545 for a family with one child.

Extension of the Child Tax Credit

The tax relief bill also extended the Child tax credit through 2012. This will help give ongoing tax breaks to approximately 10 million families who are in the lower-income range as well as 18 million children. Parents get up to $1,000 in tax credit per eligible child that is dependent on their tax return. This credit begins to phase out with married couples over $110,000 for married couples, and $75k for individuals.

Coverdell Accounts Yearly Contribution Limit Increase

The legislation extended for two more years the ability for taxpayers to contribute up to $2k a year (previously $500) and included elementary and secondary education within the definition of qualified education expenses.

Child & Dependent Care Tax Credit

The legislation of 2010 also extended the Child Tax Credit through 2012 for each eligible child. Parents can receive 20-35% of daycare expenses against $3,000 for one child and up to $6,000 for two or more children, as long as other eligibility requirements are met.

Married Penalty Relief

The legislation continued the marriage penalty relief for the next two years that would have negatively impacted married taxpayers in regards to the standard deduction, Earned Income Tax Credit, and the 15% income tax bracket.

Student Loan Interest Deduction

This deduction was also extended through 2012, which gives taxpayers the ability to take an above-line tax deduction (don’t need to itemize) for education loan interest expenses up to $2,500. Modified Adjusted Gross Income over $75,000 ($150,000 for married filing a joint return) causes the deduction to be completely phased out.

Estate and Gift Tax

The estate tax, which disappeared in 2010, reemerged for 2011 and 2012 but with limits. Currently, the exemption amounts are $5 million per individual ($10 million per couple) at a top tax rate of 35% for estate and gift taxes. These limits will be indexed for inflation through 2012.

Other Notable Tax Deductions

The tax relief act extended through 2011, the $250 above line tax deduction for teachers and other educational professionals purchasing school supplies. The deduction election for state and local sales taxes (which benefits those who live in a state with no income tax) instead of state and local income taxes will be extended through 2011 along with the provision that allows taxpayer distributions of up to $100,000 tax-free from an IRA to a qualified charity.

Tax Incentives to Help Businesses

In addition to helping families the tax relief bill will also help businesses during the 2011 tax year. The Hire Act of 2010, Jobs Act of 2010, and this recent legislation allows companies in most cases to depreciate 100% of software and equipment in 2011 that is placed into service (between 9/8/10 and 12/31/2011)! The bonus depreciation benefit was increased under the Small Business Jobs act from 50% to 100% for 2010 and is increased to 100% for 2011 under the tax relief act. This drops down to 50% in 2012, and regarding Section 179, the maximum amount expense limit and phase-out threshold also gets reduced in 2012 to $125k and $500k respectively. Therefore, 2011 is the best year to make these investments if you need to. This tax benefit is expected to generate a large amount of additional capital for businesses that need to grow and expand around the country.

Moreover, the research and development credit, 15-year write-offs for eligible leasehold improvements and restaurant buildings, the active military reservist employer wage credit, and others intend to help businesses who are struggling in this economy.

Legislature’s biggest hope is that new jobs will be created as a result of these tax breaks. For many Americans, these tax breaks come at a time when they are really needed. With the country still in economic turmoil and unemployment rates still at near-record highs, these benefits will help many families and businesses as long as we can cut spending to stop the continued borrowing by our government.