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The Tax Relief Act of 2010, how will it affect our clients?

President Obama signed into law on December 17, 2010 an extension of the Bush tax cuts. This legislation consists of lower Federal income tax rates and other items many taxpayers have benefited from, as well as a few new items. Below is a summary of issues that we feel are relevant to our clients.

Individual Provisions

Arguably the most significant and talked about provision of the Act is the extension of the current tax rates for individuals. Tax rates for individuals at all levels of income will remain the same through 2012.

Other noteworthy items extended through 2012 include:

Tax Rates

  • Reduced capital gains tax rates
  • Lower rate on qualified dividends
  • Certain alternative minimum tax fixes

Tax Credits

  • Dependent care and child tax credits
  • Certain features of the Earned Income Credit
  • Expanded adoption credit rules
  • Credits for certain energy efficient home improvements
  • Education credits

Deductions and Exemptions

  • Restriction on personal exemption phase-out
  • Increased standard deduction for married couples filing a joint return (part of the marriage penalty relief)
  • No limit on the amount of itemized deductions claimed
  • Deduction for out-of-pocket teacher expenses up to $250 extended (through 2011 only)
  • Tuition and student loan interest deductions

The election to claim state and local sales taxes, in lieu of state and local income taxes, as an itemized deduction is extended retroactively for 2010 and into 2011. The rule that allows tax-free IRA distributions to charity (up to $100,000) has also been retroactively extended to 2010 through 2011.

The Estate Tax is back

The Federal estate tax will once again be in effect for estates greater than $5 million. The tax has been applied retroactively to 2010 estates (executors may take certain steps to elect out of estate tax for 2010) and for estates opened in 2011 and after.

Reduction of Employee Social Security Tax

The employee share of social security tax, a component of FICA, will be reduced from 6.2% to 4.2% for 2011. This will decrease the amount withheld from employees’ paychecks. For example, an individual making $30,000 per year will end up with an extra $600 in his or her pocket over the course of the year.

This also benefits self-employed individuals, as the self-employment tax rate will also be lowered by two percentage points.

In summary, taxpayers at all income levels won't face a tax increase in 2011. There were also numerous other items affecting businesses added or extended as part of the legislation. Please call us if you have any questions or concerns on how this may affect you or your business.

Jon Majkut, CPA

Majkut CPA’s LTD

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