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Carol Mineau
Tax Relief, Unemployment Insurance, and Job Creation
Hi!-
After years of "hitting the snooze button, they finally did it! That's right - the lame-duck Congress passed the "Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010." President Obama wasted no time signing it. We get a little tax relief in our holiday stockings-- and this year, just about everyone is on the "Nice List."
The new law is surprisingly direct and straightforward, given its $850 billion cost. Major tax bills are typically thick enough that you can stand on them to change a light bulb. But this one clocks in at just 30 pages -- in fact, the Congressional Joint Committee on Taxation's "Technical Explanation" is five times longer than the law itself. (That's why we get the big bucks -- so you don't have to read it!) Let's take a quick look at some of the specific tax provisions:
- Extend Tax Cuts. The core of the bill, of course, extends the Bush tax cuts for two more years. This means the top rate stays at 35% (rather than 39.6%) and the rate on capital gains and qualified corporate dividends stays capped at 15% (rather than 20%). But the new law keeps taxes down for everyone, not just the highest earners. If those Bush cuts hadn't been extended, the 10% rate would have disappeared, and tax brackets would have increased faster for everyone. So don't think that you get no benefit just because you aren't in those top brackets!
- Payroll Tax Relief. The bill reduces the employee portion of Social Security and self-employment taxes by 2% for 2011 only. This replaces the $400/person "Making Work Pay" credit in effect for 2010 "" and ironically means higher taxes for individuals making under $20,000 and families making under $40,000.
- Estate Tax Relief. This is actually the most controversial part of the legislation. Under current law, the estate tax was scheduled to kick back in at 55%, on estates topping $1 million. Most observers expected Congress to restore the tax at the 2009 level, with a 45% tax applying on estates over $3.5 million. But the new law is even more generous, with a tax of just 35% on estates over $5.0 million. Again, this rule applies for 2 years.
- Other Provisions. Finally, the bill extends a laundry list of popular tax breaks that otherwise would have expired: (1) it "patches" the Alternative Minimum Tax system for two more years, thus protecting millions of Americans from the AMT, (2) it extends the Child Tax Credit and American Opportunity Tax Credit for college tuition, (3) it expands the Earned Income Tax credit for low-income working families, (4) it extends bonus depreciation and first-year expensing deductions for businesses, and (5) it extends miscellaneous tax deductions like educator expenses, state and local sales taxes, and tax-free IRA distributions given directly to charity.
Now let's talk about what this all means. The reality is, the law's provisions will last about as long as Grandma's holiday fruitcake - two years at most. That means Washington will have to fight it out all over again - with a divided Congress, in a Presidential election year "" with another $2 trillion or so added to the national debt on top of the $13.9 trillion or so that's already there! Republicans naturally favor keeping taxes low to stimulate economic growth. And even Democrats, who would normally favor raising taxes to close the deficit, have been reluctant to do so in today's weak economy. But if the economy continues to pick up over the next two years, there may be enormous pressure to increase taxes. This will make tax planning even more important over this period.
This holiday season, we wish you and your family all the best. Count on us to keep an eye out for the best ways to spread holiday tax relief. And remember to call us with your year-end finance questions!
Glenn R. Wilson
3887 State Street, Suite 110
Santa Barbara, CA 93105
805-898-9177 Fax 805-898-0117
www.abwtax.com
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