Massive Tax Package Helps All Taxpayers

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act will help you in 2010, 2011, and 2012. Here are some highlights of note.

Payroll Tax Cut in 2011

For one year, the Social Security portion of FICA imposed on employees, which is normally 6.2%, is reduced to 4.2%. Those earning $1,000 a week will have their take-home pay increased by $20. Those earning the maximum wage base for Social Security-$106,800-will save $2,136 for the year.

The cut is for every worker, so that a couple could save as much as $4,272 for the year. Self-employed individuals enjoy the same tax savings on the employee portion of Social Security tax when computing their self-employment tax; they can adjust their quarterly estimated taxes to reflect the savings.

Extensions for 2010

Most provisions that expired at the end of 2009, including the above-the-line deduction for tuition and fees, the $250 educator deduction, and the itemized deduction for state and local sales taxes, have been extended for 2010; they will continue to apply through 2011.

Two additional standard deduction amounts that expired at the end of 2009 have not been extended: the deduction for state and local property taxes and the deduction for net disaster losses.

Alternative Minimum Tax

There is a “patch” for the alternative minimum tax (AMT) to keep more than 20 million taxpayers from owing AMT in 2010 and 2011. The exemption amounts have been increased for both of these years. Also, nonrefundable personal credits can be used to offset both regular tax and AMT.

Extensions for 2011

The current tax rates, including favorable treatment for capital gains and qualifying dividends, continue to apply in 2011 and 2012 for all taxpayers. In addition, many of the enhanced tax incentives, including a higher child tax credit and dependent care credit, also apply in these two years.

Estate Tax Changes

The federal estate tax has been changed through 2012. Retroactive to January 1, 2010, there is a $5 million exemption per person, a top estate tax rate of 35%, and a full stepped-up basis for inherited property. For estates of decedents dying in 2010, there is an option: Use the rules that had been in effect for 2010 (no federal estate tax with a modified carryover basis for inherited property) or the new estate tax rules ($5 million exemption, tax rate of 35% and a full stepped-up basis). The decision does not have to be made until the end of September 2011.

Starting in 2011, there is “portability,” which allows the unused portion of the exemption for a decedent to be used by a surviving spouse.

Source: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act