At long last, both the Senate and the House of Representatives have passed a new, albeit temporary, tax bill, with the President’s signing on Friday. The Bush tax cuts of 2001 and 2003 were scheduled to expire at the end of 2010, meaning that all Americans would have paid more income tax in 2011. Passage of the new tax bill extends most of the tax cuts and credits for two years, leading to the whole package being re-examined in 2012, a Presidential election year. It should be interesting!
Following is a summary of the bill:
Income Tax Rates: Income tax rates will stay the same, capping out at 35% for individuals, rather than the 39.6% if the laws had been allowed to expire. Also, the reduced tax rate of 15% will stay intact for qualified dividends and long term capital gains. For individuals in the 10%-15% tax bracket, long term capital gains are still 0% for 2011 and 2012.
Social Security Taxes: For working individuals, the good news is that the Social Security portion of their payroll tax will be cut from 6.2% to 4.2% for 2011 and 2012. This applies to everyone who pays into Social Security and is an enhancement over the current Making Work Pay Credit, which was limited based on income.
Estate Tax: The federal estate tax, repealed for 2010, will have an exemption of $5,000,000 for 2011 and 2012. This means that for individuals who die in those years, the value of their estate will be reduced by $5,000,000 before calculating estate tax. Further, the estate tax rate is reduced to 35%, down from the 55% it would have reverted to if the cuts had not expired.
College Tuition: The existing American Opportunity Credit has been left intact for the next two years. This replaced the Hope Credit and was beefed up to include all four years of college and higher income individuals. The income limit for this credit is $90,000 for single individuals and $180,000 for married couples.
Alternative Minimum Tax (AMT): Once again, the amount of income subject to AMT is reduced as the AMT exemption is increased, freeing some middle-income taxpayers from being subject to this higher tax.
Child Tax Credit: The child tax credit is renewed at $1,000 per qualifying child and remains as a refundable credit. This means that taxpayers who have no federal tax liability (or have enough credits to completely offset their tax liability) can still receive this credit as a refund, effectively bringing their tax bill below zero.
Jobless Benefits: Although not considered a tax cut, a crucial portion of the bill is an extension of benefits for the unemployed. They are given an additional 13 months to collect benefits.
As you can see, there is something for everyone in this new bill. As is often the case in tax law, there are details, limits, exceptions, and phase outs, so be sure to consult a tax advisor for more information.
Linda Ialacci, CPA is a manager with Horvath & Giacin, P.C., located at 130 Route 31 North in Pennington. She can be reached at 609-737-0300, or at firstname.lastname@example.org.