2010 Tax Relief Act: Key Income Tax Changes

by Matt Ottemann

Ottemann, Matthew
(402) 341-3040

Just in time for the new year, Congress has passed, and President Obama has signed, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”). This sweeping tax package includes an extension of the “Bush tax cuts” for two years, estate tax relief, alternative minimum tax relief, and a cut in employee-paid payroll taxes and self-employment tax in 2011. Key elements of the Act include:

  • Income Tax Rates.  Current income tax rates will be retained for 2011 and 2012, including a top rate of 35% and a 15% rate on capital gains and qualified dividends.
  • Payroll Tax Reduction.  The Social Security payroll tax will be reduced in 2011 from 6.2% to 4.2% for employees and from 12.4% to 10.4% for the self-employed.
  • Itemized Deduction Limitation.  The overall itemized deduction limitation for higher-income taxpayers was eliminated.
  • Personal Exemption Phaseout.  The personal exemption phaseout for higher-income taxpayers was eliminated. The personal exemption amount for 2011 is estimated to be $3,700.
  • Marriage Penalty Relief.  The Act continues relief from the marriage penalty, making the standard deduction and 15 percent regular income tax bracket for joint filers twice that of an unmarried individual filing a single return.
  • Alternative Minimum Tax Patch.  A two year AMT “patch” sets the AMT exemption for 2010 and 2011 slightly above 2009 levels and will allow personal credits to offset AMT.
  • Extension of Popular Individual Tax Provisions.  Several popular tax breaks for individuals, which had expired after 2009, were reinstated for 2010 and extended through 2011, including:
  1. The $1,000 maximum child tax credit. Prior to the Act, the credit was capped at $500 for 2010. In addition, this credit will be allowed against AMT liability.
  2. The American Opportunity Tax Credit for college costs.
  3. The itemized deduction for state and local sales taxes, as well as state income taxes.
  4. The above-the-line deduction for qualified higher education expenses.
  5. The above-the-line deduction for teachers for expenses incurred for educational materials used in the classroom (capped at $250).
  6. Tax-free distributions to charity from an IRA account, up to $100,000 per taxpayer, per tax year. In addition, individuals will be allowed to make charitable transfers during January 2011 and treat them as if made in 2010.
  7. The allowance of premiums for mortgage insurance to be deductible as qualified residence interest in 2011.
  • 100% First-Year Depreciation For Equipment And Machinery.  Businesses may write off 100% of certain equipment and machinery purchases, effective for property placed in service between September 9, 2010 and December 31, 2011. For qualifying machinery and equipment purchased in 2012, the Act provides for 50% first-year depreciation. Eligible machinery and equipment includes new depreciable property with a recovery period of 20 years or less (which may include special purpose agricultural structures); computer software; qualified transportation property (potentially including aircraft); and qualified leasehold improvements.
  • Enhanced Small Business Expensing For 2012.  For tax years beginning in 2012, a small business taxpayer will be allowed to write off up to $125,000 (to be indexed for inflation) of capital expenditures, subject to a phaseout once capital expenditures exceed $500,000. In addition, the rule which treats off-the-shelf computer software as qualifying property is extended through 2012.
  • Extension of Business Tax Provisions.  Several business tax incentives, which had expired after 2009, were reinstated retroactively for 2010 and extended through 2011, including:
  1. The research and development credit.
  2. 15 year write-offs for qualified leasehold improvements and certain improvements to restaurant buildings.
  3. The employer wage credit for activated military reservists.
  4. The enhanced deduction for contributions of food and book inventories, and computer equipment for educational purposes.
  5. The work opportunity credit (extended through the end of 2011).
  • Exclusion of Gain on Small Business Stock.  The Act extended the exclusion of 100% of gain from the sale of certain small business stock acquired after September 27, 2010 and before January 1, 2012.

In addition to these changes, the Act notably omitted two provisions. First, the Act failed to repeal a controversial expansion of Form 1099 reporting requirements as discussed in the July/August 2010 Newsletter; a copy of this article is available on the McGrath North website. Second, the Act did not extend the Build America Bonds program, which permitted state and local governments to issue federally-subsidized municipal bonds.

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