What do the tax extensions mean to me?

Joe Popp | December 20th, 2010

On Friday, December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (HR 4853) after the compromise bill worked its way through approval by both houses of Congress. The new law contains a number of extensions of popular tax provisions for individuals, businesses and estate/gift taxes. Below is a quick roundup of the provisions for individual taxpayers. We will outline business provisions in a separate post. Most of the provisions below are scheduled to sunset in some way on 12/31/20112.

  • Extension of Bush Tax Cuts – The current tax rates (10, 15, 25, 28, 33 and 35 percent brackets) have been extended for all taxpayers through 12/31/12.  Along with payroll relief outlined below, a person making $50,000 will see a combined savings of $1,890 over what they would have paid next year without the bill.
  • Marriage Penalty Relief Extended – The increased standard deduction available to persons filing jointly and the expanded 15 percent bracket size for persons filing jointly (both of which reduce the tax burden for filing jointly) have been extended through 12/31/12.
  • Payroll Tax Cut – Through 12/31/11, the bill provides a 2 percent rollback on employee’s share of Social Security (so employees would pay 4.2 percent instead of 6.2 percent on their first $106,800 of wages).  Self-employed individuals would pay 10.4 percent up to the wage base.  Unlike the Making Work Pay payroll tax cut, this is available to all wage earners regardless of income level (there are no phase-outs).
  • Qualified Capital Gain and Dividend Rates Extended – the maximum 15 percent rate has been extended for all taxpayers through 12/31/12.  The zero percent rate for those in the 10 and 15 percent income tax brackets has also been extended.
  • AMT patch – An increase of the exemption amounts to $47,450 ($72,450 taxpayers married filing jointly) through 12/31/12.
  • Itemized Deduction Limitation Postponed – The “Pease” limitation reduces the availability of itemized deductions for taxpayers making over $169,550.  The limitation is repealed for 2010, but was set to return in 2011.  The bill extends the full repeal through 12/31/12.
  • Personal Exemption Phase out Postponed – For taxpayers with incomes over $169,550, personal exemptions were scheduled to gradually phaseout (a 2 percent reduction of the credit for each $2,500 in income over the $169,550).  The phaseout was repealed for 2010 and the bill extends that repeal through 12/31/12.
  • Energy Efficient Home Improvements – The bill extends the 30 percent credit for energy efficient insulation and other building envelope components, water heater, and furnace expenditures, but the credit is capped at $500.  The bill does not extended the enhanced $1,500 maximum amount (so if you got a credit of over $500 in the 2009- 2010 time period, you appear to have exhausted this credit).
  • Child Tax Credit Enhancements extended – The $1,000 version of the credit, which is refundable and can offset AMT, has been extended through 12/31/12.
  • Earned Income Tax Credit – The following enhancements, which were scheduled to sunset on 12/31/10, have been extended through 12/31/12:  increased beginning and end eligibility points, increased credit for 3 or more children, simplified earned income definition, elimination of reduction in credit if you had an AMT liability, modified relationship and tie-breaking tests, and IRS math error authority.
  • Adoption Credit – The enhanced adoption credit has been extended through 12/31/12.
  • Dependent Child Care Credit – The $3,000 and maximum 35 percent of expenses version of the credit has been extended through 12/31/12.
  • Mortgage Insurance Premiums – The itemized deduction for these expenses has been extended for one year, through 12/31/11.
  • American Opportunity Tax Credit – The revised and renamed Hope credit is extended through 12/31/12.
  • Educational Assistance Exclusion – The annual exclusion of up to $5,250 in employer-provided educational assistance has been extended through 12/31/12.
  • Student Loan Interest Deduction – The repeal of the five-year treatment (deductible only for 5 years after graduating) and the expanded phaseout rules have been extended through 12/31/12.
  • State and Local Sales tax deduction – extended through 12/31/12.
  • Above the line tuition deduction – extended through 12/31/12.
  • Above the line teacher’s expense deduction – extended through 12/31/12.
  • Rollovers of IRAs to charity – extended through 12/31/12.

We’ll go into more depth about several of these extensions in future posts, as well as provide you with a summary of tax provisions impacting businesses. To learn more about how each provision will impact you, be sure to talk to your accounting professional.

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