The recent signing into law of H.R. 4853 — the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 — represents the most significant tax law in a decade. At a cost of $858 billion, it represents a tremendous investment at a time when the nation’s economic recovery is fragile. In addition to extending tax rates that were due to expire at year-end, the new law extends certain unemployment benefits through the end of 2011.

Key tax-related provisions of the law include:

 

PROVISION DESCRIPTION
Individual taxes
Current tax rates extended through end of 2012
  • 35% maximum ordinary income tax rates
  • 15% maximum long-term capital gains and qualified dividends rates
AMT relief
  • Exemption amounts increased:
    • 2010: $72,450 (couples); $47,450 (individuals)
    • 2011: $74,450 (couples); $48,450 (individuals)
Payroll tax for Individuals
  • Reduced from 6.2% to 4.2% for 2011
Tax-free IRA distributions to a qualified charity
  • Available for 2010 and 2011
  • Additional provision allows IRA distributions sent directly to a charity through January 2011 to be applied as a 2010 charitable contribution
No income limitation on itemized deductions or personal exemptions, regardless of income level
  • Extended through 2012
Estate taxes
Increase in the estate tax exemption amount
  • Estate tax exemption amount increased to
    $5 million for 2011 and 2012
Maximum estate and gift tax
  • 35% maximum rate will be in place through 2012
Special election with respect to estates of decedents dying in 2010
  • Estates will have the following choices:
    • New estate tax provisions: $5 million exemption amount, 35% maximum tax rate, full “step-up” in cost basis on inherited assets
    • No estate tax with limited step-up in cost basis ($1.3 million added to cost basis for non-spouses; $3 million for spouses)
Repeal of carryover cost basis for 2011 and 2012
  • Inherited assets receive full “step-up” in cost basis
Option to utilize unused portion of deceased spouse’s estate tax exemption
  • Through 2012, surviving spouses can apply any unused portion of their deceased spouse’s exemption, up to $5 million, toward reducing their taxable estate
Education funding provisions
American Opportunity Tax Credit
  • $2,500 per student maximum annual credit extended through 2012
Coverdell Education Savings Accounts (ESAs)
  • $2,000 contribution limit extended through 2012
  • Accounts can still be used to fund private elementary and high school expenses
Student loan interest deduction
  • $2,500 maximum deduction extended through 2012
Above the line deduction for qualified tuition and related expenses extended through 2011
  • $4,000 maximum deduction for taxpayers with AGI of $65,000 or less ($130,000 for joint returns); or
  • $2,000 maximum deduction for taxpayers with AGI of $80,000 or less ($160,000 for joint returns)

Although this legislation provides clarity for the next two years, there are still long-term considerations as budget deficits and entitlement programs need to be addressed. It is crucial to meet with your clients now to assess their personal financial situations and identify opportunities to take advantage of lower tax rates over the next two years.