On December 17th, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 into law. From a tax perspective, this Act extended the Bush tax cuts for two years through 2012. Let’s look at some of the specific tax changes:
No Change to Tax Rates:
- The six tax brackets will remain unchanged through 2012. That means we’ll continue with the 10%, 15%, 25%, 28%, 33% and 35% brackets for two more years. As we discussed in our October 2010 Newsletter, each of these brackets was set to rise by 3% or more.
- Congress included a patch to limit the impact of the Alternative Minimum Tax (AMT) through 2011. Each year, Congress struggles to pass a one-year fix to the AMT that keeps millions of taxpayers from paying this secondary tax. A few years back, it was estimated that the number of people paying the AMT would jump six-fold – from 4 million to 23 million if the ATM patch were not extended that year.
- The tax rate on long-term capital gains and corporate dividends remains at 15% through 2012. Without an extension of these tax cuts, the tax rate on long-term capital gains would have jumped to 20%, while corporate dividends would have been taxed at your marginal tax bracket.
Let’s Give Credit Where Credit Is Due:
The Bush tax breaks also extended many of the tax credits claimed by working Americans, including:
- Child Tax Credit: This credit worth $1,000 per child under the age of 17 would have been cut in half to $500 per eligible child.
- Dependent Care Credit: Under the extended rules, you can claim this credit based on the first $3,000 of dependent care expenses paid on behalf of one child, or $6,000 if you have two or more children under the age of 13. Had no extension been passed, this credit would have been cut by 20% – to be based on the first $2,400 of qualified expenses for one child or $4,800 for two or more eligible children.
- The new American Opportunity Credit, which was passed by Obama in 2009 and improved upon the Hope Education Credit, was extended through 2012. Originally, this lucrative tax credit would have expired at the end of 2010.
- The elimination of the Stealth Tax continues through 2012. For many years, the tax rates for the top tax brackets was higher than advertised due to the fact that taxpayers had their personal exemptions and itemized deductions phased-out once their Adjusted Gross Income exceeded a certain threshold. These phase-outs finally disappeared in 2010, but were set to return on January 1, 2011.
- Anyone paying student loans who is eligible to deduct the interest paid will continue to write-off the first $2,500 of interest paid annually. Due to this Tax Act, the rule stating that you can only claim this interest for the first 60 months of repayment will not return until after 2012.
This Tax Act makes it a great time to purchase equipment. For starters, purchases of new equipment qualify for unlimited 100% bonus depreciation. That means you can write off the full cost of these assets, no matter how much assets you purchase or how much income you earn. Only new assets purchased between 9/9/10 and 12/31/11 qualify.
If you purchase used equipment, you can still write-off the first $500k that you purchase as a Section 179 deduction. Starting in 2012, the Section 179 deduction falls to $125k per year.
Tax Planning Became a Little Easier
After suffering through 2010 when there was a lot of uncertainty about the upcoming tax rules, we can now say confidently that we know exactly what to expect for 2011 and, to a lesser degree, for 2012.