New tax law passes

The House and Senate have voted, and President Obama has signed the new Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010). The new law includes a number of tax breaks for many taxpayers. Here are some highlights that a client may wish to discuss with their tax professional or attorney:

Current tax rates and certain tax breaks extended for two years

• The Tax Relief Act extends the tax rates of 10%, 15%, 25%, 28%, 33%, and 35% for another two years.
• The new law extends for two years the repeal of the phaseout of personal exemption for certain high-income taxpayers.
• The new law also extends for two years the repeal of the limitation on itemized deductions for certain high-income taxpayers.

Capital gains and dividends

• The Tax Relief Act sets capital gains and qualified dividends tax rates at 0% and 15% for another two years.

AMT patch

• The new law increases the AMT exemption amounts for two years.

Estate tax

• The Tax Relief Act sets the estate tax exemption at $5 million per person and $10 million per couple for estates of decedents dying in 2011 and 2012.
• The new law reunifies gift and estate taxes. The gift tax exemption increases to $5 million per person for gifts made in 2011 and 2012.
• The new law also caps the tax rate at 35% for estates, gifts, and generation-skipping transfers.
• The new law provides a choice for estates of decedents who died in 2010 to use the new estate tax exemptions/rates with a stepped-up basis rule, OR to use the existing 2010 law with no federal estate tax but a limit in the amount of basis step-up that is allowed.
• The new law allows for "portability" of the estate tax exemption, meaning that any unused estate tax exemption of a deceased spouse can be carried over and utilized by the other spouse who dies second.

Other points of interest:

• The employee withholding portion of the Social Security payroll tax will be reduced by 2.0% for 2011 (e.g., 6.2% withholding is reduced to 4.2%).
• Extends for 2010 and 2011 the ability of taxpayers age 70½ or older to exclude from gross income up to $100,000 of qualified charitable distributions.
• Extension of unemployment insurance benefits for 13 months.