The 2010 Tax Relief Act – Individuals

It seems that Congress tries to see how close to the end of the year they can get before passing major tax legislation.  This year has seen a number of changes in the tax law, but the most recently enacted tax law, the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” largely keeps the 2001 Bush tax cuts in place for two more years.  “TRUIRJCA.” Is not a pronounceable acronym for this legislation, so it will be known as the 2010 Tax Relief Act.   

PAYROLL TAX CUT. Make no mistake, just about everyone will benefit from this legislation.  You may not realize it, but without this legislation most individuals would have faced a large tax increase in 2011.  One provision of the law, however, will put more money in the pockets of American wage-earners.  For the year 2011 only, the employee-share of social security taxes is decreased two percentage points.  Instead of 6.2% being withheld for social security, only 4.2% will be withheld.  If your earnings are $60,000, this is $100 in your pocket each and every month.  Self-employed individuals will see an identical 2% reduction in the self-employment tax.  This decrease will not affect future social security benefits.

 INDIVIDUAL TAX RATES. Individual tax rates will remain at their current levels through December 31, 2012.  After that time, they are scheduled to increase to their pre-2001 levels.

 CAPITAL GAIN RATES.  The zero and 15% rates for capital gains (and qualified dividends will remain in place through December 31, 2012.  Additionally, the 100% exclusion of gains from the sale of qualified small business stock is extended.

 PERSONAL EXEMPTION AND ITEMIZED DEDUCTION LIMITATIONS.  Taxpayers whose income exceeds a certain level have been faced with limitations on the amount of their itemized deductions and personal exemptions.  These limitations phased out in 2010 but were scheduled to return in 2011. They are now extended through 2012.

 MARRIAGE PENALTY. Since 2001, the standard deduction for joint filers has been double that of single filers.  Additionally, the 2001 legislation expanded the 15% bracket for joint filers.  These were scheduled to terminate on December 31, 2010, but have been extended for an additional two years.

 CHILD TAX CREDIT.  The child tax credit is maintained at $1,000 for an additional two years.  However, it does begin to phase out for joint filers with adjusted gross incomes of $110,000 or more ($75,000 for other filers).

 OTHER FAMILY-RELATED CREDITS.  The current provisions of the Earned Income Tax Credit, the Adoption Credit, and the Dependent Care Credit have been extended for an additional two years. 

 MORTGAGE INSURANCE PREMIUMS.  The deductibility of certain premiums paid for qualified mortgage insurance has been extended for one year only.

 EDUCATION.  Several provisions in the 2010 Tax Relief Act deal with education.  Formerly known as the Hope Scholarship Credit, the American Opportunity Tax Credit has been extended through 2012.  This credit can be claimed for all four years of postsecondary education.

 In addition, the provision allowing employees to exclude up to $5,250 in employer-provided education assistance has been extended for an additional two years.  The enhanced student loan interest deduction has likewise been extended for two years.

 Coverdell Education Savings Accounts remain at a maximum of $2,000 per year and can be used for elementary and secondary school expenses in additional to post-secondary school costs.  These provisions expire December 31, 2012. 

 The National Health Service Corp Scholarship Program and the Armed Services Scholarship Program remain as qualified scholarships that may be excluded from tax through the end of 2012.

 INDIVIDUAL TAX EXTENDERS. Several individual tax incentives had expired at the end of 2009.  These are extended through 2011.  These include:

• State and local sales tax deductions
• Higher education tuition deduction
• Teacher’s classroom expense deduction
• Charitable contribution of IRA proceeds
• Charitable contribution of appreciated property for conservation purposes.

 ALTERNATIVE MINIMUM TAX.  The so-called AMT “patch” has been extended through 2011.  This “patch” raises the exemption amounts for the AMT, allowing several million taxpayers to avoid this tax.

 This has been a brief overview of the changes brought about for individual taxpayers as a result of the 2010 Tax Relief Act.  It is by no means comprehensive as the entire act exceeds 12,000 words and 74 pages.  For details, you should consult your tax professional before taking any action based on the topics covered here.