Last night Congress passed and sent to President Obama a bill that will extend the Bush-era tax cuts to 2012 for all individual taxpayers, allow businesses to write off all equipment purchases in 2011 and extend several business tax credits into 2011.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Act“) also will reinstitute the estate tax, but at a lower rate and higher exemption than originally scheduled, provide a two-year “patch” on the Alternative Minimum Tax (AMT) and reduce workers’ share of Social Security Tax from 6.20 percent to 4.20 percent in 2011. President Obama has said that he plans to sign the bill, H.R. 4853, into law probably as soon as Dec. 17.

With the passage of this highly anticipated bill, individuals and businesses can move forward with certainty on some major aspects of 2011 tax planning.

Here are some of the bill’s important provisions for individuals and for businesses:

Individual Tax Provisions

The tax rates for individuals and for married couples filing jointly will be at the rates they have been since 2001. Those rates and incomes (adjusted for 2011 inflation indexing) are projected to be:

Tax Bracket Married Filing Jointly Single
10% $0 – $17,000 $0 – $8,500
15% $17,000 – $69,000 $8,500 – $34,500
25% $69,000 – $139,350 $34,000 – $83,600
28% $139,350 – $212,300 $83,600 – $174,400
33% $212,300 – $379,150 $174,400 – $379,150
35% Over $379,150 Over $379,150

The Tax Act would extend the above tax rates through 2012. The reduced 15 percent rate on qualifying dividends and long-term capital gains (originally set for an increase in 2011) is extended for 2011 and 2012, as well.

In addition to the much-anticipated extension of the tax rates, the Tax Act also renews other Bush-era tax provisions. The overall limitation on itemized deductions and the phase-out of personal exemption for higher-income taxpayers have been removed through 2012.

Other provisions that were scheduled to expire in 2010 and have been extended through 2012 include:

  • Itemized deduction for state sales tax
  • Relief of the so-called “marriage penalty”
  • Education incentives (such as deduction for student loan interest and qualified tuition, exclusion of employer-provided assistance, modified Hope credit for qualified tuition, and Coverdell education savings accounts).

Finally, the Tax Act increases the alternative minimum tax exemption based on 2009 indexed amounts. Without this “AMT patch,” the exemption would have dropped to pre-2001 levels and subjected a significant number of taxpayers to higher tax liabilities because of this alternate system of taxation.

Business Tax Provisions

The Tax Act expands the bonus (first-year) depreciation provisions to allow full write-off of qualifying assets (such as computers, furniture, machinery and certain computer software) if they were acquired and placed in service between September 8, 2010 and December 31, 2011. Qualifying assets placed in service during 2012 will be allowed a 50 percent bonus depreciation.

In addition to bonus depreciation provisions, the Tax Act increases the small business expensing provisions of Section 179 for years 2012 and 2013 and extends through 2011 other expiring provisions, including:

  • 15-year depreciation for qualifying leasehold improvements
  • Research and development credit
  • Work opportunity credit

Estate Tax

Under the Bush-era tax bills, the estate tax was slowly phased out over a nine-year period, culminating in a complete repeal of the tax and special “modified carryover” rules for 2010. Those provisions were scheduled to sunset on December 31, 2010 with a return to the pre-2001 estate tax rates (55 percent) and reduced exemption ($1 million) in 2011.

The Tax Act reinstates the estate tax for decedents dying after 2009 at a 35 percent tax rate and an exemption of the first $5 million per estate. In addition, new rules would allow the portability of unused exemption between spouses. These provisions would apply through 2012.

In the case of decedents dying in 2010, the executor of the estate can elect to apply the pre-Tax Act rules if it is determined that they are more beneficial.

Payroll/Self-Employment Tax Holiday

During 2011, the Tax Act gives a 2 percent payroll/self-employment tax holiday for employees and self-employed. As a result, employees will pay only 4.2 percent (instead of 6.2) FICA tax on wages and self-employed individuals will pay only 10.4 percent (instead of 12.4) self-employment taxes. This means a potential tax savings of $2,136 for individuals earning more than the $106,800 threshold amount.

Unemployment Benefits

The bill would extend the emergency unemployment benefits program through December 31, 2011. The program allows individuals to receive unemployment benefits for up to 99 weeks.

If you would like additional information on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, do not hesitate to contact us at (305) 373-5500.