On December 17, 2010 the President signed into law the Tax Relief Unemployment InsuranceReauthorization and Job Creation Act of 2010.  The massive tax relief package, enacted after months of debate, provides tax benefits for 2010, 2011, and 2012.  Below is a summary of key items within that Act and how it will affect you

 Payroll tax cut in 2011.  For 2011 only, employees will get an increase in their take home pay of 2%, as only 4.2% of their wages (up to $106,800) will be withheld for Social Security tax purposes instead of the regular 6.2%.  Government employees who do not pay into Social Security do not benefit from the payroll tax cut reduction and the new law does not make up for this with a cash payment or separate tax reduction.  For self-employed individuals, the 2011 self-employment tax rate will be 10.4% instead of the usual 12.4%. (The 10.4% is the total of the 4.2% share of the social security tax for employees plus the 6.2% employer share, which is not reduced by the new law).  The Medicare component of FICA remains 1.45% for employees and 2.90% for self-employed individuals. 

Strategy:  Set-up an individual retirement account and have 2% of your wages automatically transferred every month into it.  You are not used to needing that extra 2% for living expenses, why not have it go towards building your nest egg.

Extenders for 2010 returns.  Several tax breaks that expired at the end of 2009 are extended to 2010 and 2011.  These include:  the above-the-line deduction for tuition and fees , the first $250 of educator expenses, and the itemized deduction for state and local sales taxes that can be claimed instead of state and local income taxes.

The rule allowing individuals age 70 ½ and older to exclude from income up to $100,000 of IRA distributions that are directly transferred to charity has been extended to 2010 and 2011.  The new law did not extend 2 additions to the standard deduction that applied for 2009.  On 2009 returns, the standard deduction could be increased by state and local property taxes paid up to $500 or $1,000 (joint) as well as by a 2009 net disaster loss from a federally declared disaster.

AMT for 2010 and 2011.  To keep the AMT exemption from falling and forcing over 20 million taxpayers to pay the AMT, an annual “patch” has been necessary.  The new law increases the exemption for 2010 to $72,450 for married couples filing jointly, $47,450 for single taxpayers and heads of households, and $36,225 for married persons filing separately.    For 2011, the exemptions will be $74,450 for married filing jointly, $48,450 for single and heads of household, and $37,225 for married persons filing separately. 

Child Tax Credit and other tax credits.  The child tax credit had been scheduled to drop from $1,000 per qualifying child in 2010 to $500 starting in 2011, but the new law extends the $1,000 credit through 2012.  The American Opportunity credit of up to $2,500 of qualified tuition and fees per student for up to 4 years of post-secondary education expired at the end of 2010, but the new law extends it to 2011 and 2012.  The new law also extends to 2011 and 2012 the dependent care credit.  The credit for home energy savings improvements such as windows, doors, insulation will be lower in 2011 than it was for 2009 and 2010.  The 30% credit rate will fall to 10%and the maximum credit drops from $1,500 to $500, with lower caps for specific items, such as$200 for windows and $150 for furnaces or hot water boilers.  Prior credits can eliminate the credit; the $200 windows limit and overall $500 limit are reduced by all credits claimed after 2005.

Bush individual tax rates and capital gains/dividend rates extended.  Without the new law, in 2011 the 10% and 25% individual tax rates would have disappeared and the top 2 brackets would have gone from 33% and 35% to 36% and 39.6%.  The new law keeps the rates on ordinary income at 10%, 15%, 25%, 28%, 33%, and 35% through 2012.  The 0% and 15% rates on long-term capital gains and qualified dividends are also extended through 2012.

Estate Tax restored for 2011 and 2012.  The federal estate tax is reinstated for 2011 and 2012 with a $5 million exemption and a top rate of 35%, and stepped -up basis allowed for the inherited assets.