2010 Tax Relief Act for Individuals

Income Tax Rate Changes – The 2010 Tax Relief Act (TRA) extends the current tax rate of 10, 15, 25, 28, 33 and 35 percent through December 31, 2012. Without the 2010 TRA, the income tax rate was going to reverse to 15, 28, 31, 36 and 39.6 percent after December 31, 2010. In addition, the new law also extends the full repeal of the limitation on itemized deductions, personal exemption phase-out, and marriage penalty relief through December 31, 2012.

Payroll Tax Cut – The 2010 TRA reduces the employee-share of the OASDI portion of Social Security Taxes from 6.2% to 4.2% for wages earned in 2011, up to $106,800. This payroll cut replaces the Making Work Pay Credit that was applied in 2009 and 2010. Employers share remains at 6.2% and the Medicare portion of Social Security Tax remains at 2.9%.

Capital Gains & Dividends Tax Rate – The new law extends the reduced capital gain and dividend tax rate through 2012. Individuals in the 10% and 15% income tax brackets will continue to pay 0% tax on capital gain and qualified dividends. Individuals in higher-rate brackets will enjoy a maximum of 15% tax rates. Before the 2010 Tax Relief Act was enacted, the capital gain rate was scheduled to rise to 20% in 2011, and dividend rates to rise from 15% to the tax rates on regular income, a maximum of 39.6%.

Tax Credits – The new law also extends the following tax credits for two years through December 31, 2012:

• Child Tax Credit;
• Earned Income Tax Credit;
• The increased dollar limitation for the Adoption Credit;
• The income exclusion amount for employer-paid expenses to $10,000;
• The $3,000 ($4,800 to $6,000 for more than one qualifying individual) Dependent Care Credit;
• The American Opportunity Tax Credit; and
• The tax credit (25% of qualified expense, a maximum of $150,000) for qualified expenses employers’ paid for employee childcare.  

Other Tax Incentives – The following incentives are extended for 2010 and 2011:

• State and Local Sales Tax Deductions;
• Higher Education Tuition Deduction;
• Teacher’s Classroom Expense Deduction;
• Charitable contributions of IRA proceeds; and
• Charitable contributions of appreciated property for conservation purposes. 

AMT Patch – The new law provides an AMT “Patch” for 2010 and 2011, which continues to provide higher exemption amounts for AMT tax purposes. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.

Estate Tax – The new law changes the maximum estate tax rate to 35%, with an exclusion amount of $5 million for tax years January 1, 2010 through December 31, 2012. It also provides two options to estates of descendents who died during January 1, 2010 through December 31, 2010:

• Pay estate tax at 35% estate tax rate, with$5 million exemption and receive a stepped-up basis, or
• Pay no estate tax, but receive only $1.3 million of modified carryover basis adjustments.

In addition, the surviving spouse of a deceased individual who passed away in 2010 may take advantage of the unused portion of the estate tax exclusion from January 1, 2011. Lastly, the new law extends the state death tax credit/deduction for two years through December 31, 2012.

Gift Tax - For gifts made in 2010, the 2010 TRA provides that gift tax is computed at top rate of 35% and the maximum applicable exclusion amount is $1 million. For gifts made after 2010, the gift tax is reunified with the estate tax with a top rate of 35% and a maximum application exclusion amount of $5 million.