The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (HR 4853) (the “Act”) is now law. The press has already written much about the political circumstances that gave rise to this law. Because understanding what these changes cost requires reviewing detailed accounting summaries, most press coverage repeats political ideologue from talking heads, and fails to report specifics. Here, we will provide details of what is in the Act, and what these changes will cost.
The Act is quite complicated. Generally, the Act:
- Extends the 2001 and 2003 Bush era tax cuts for all taxpayers for two years – All income tax rates will remain the same for the next two years (2011 and 2012) as they have been for the previous ten years.
- Extends the current 15% lower tax rates on dividends and capital gains (Certain lower-bracket taxpayers pay no tax on these income types.)
- Extends many of the 2009 stimulus tax cuts and “extenders”. However, the Making Work Pay Credit expired and was not renewed.
- Reduces the employees’ share of Social Security taxes by 2% – The employee portion of the social security tax rate drops from 6.2% to 4.2% in 2011. The self-employment tax drops from 12.4% to 10.4%.
- Extends Alternative Minimum Tax (AMT) Tax Relief for 2010 and 2011 – A two-year (2010 and 2011) “patch” has been re-implemented that increases the amount of the AMT exemption. Around 21 million people, mostly in the middle class, will not be subject to the AMT in these two years. Absent other changes in your tax situation, you will most likely have the same AMT position as last year.
- Reduces the estate and gift tax – The change in the estate tax is the biggest surprise in the Act. Our separate estate tax article describes these changes and the related planning opportunities.
- Allows a 100% write-off for new equipment business investments placed in service after September 8, 2010 and before January 1, 2012 – Property placed into service during 2012 will be eligible for 50% bonus depreciation.
- Extends unemployment insurance benefits for 13 months – 2 million people will continue to receive benefits.
- Extends a very long list of other tax benefits that would have otherwise expired. A small sampling of these include:
- $1,000 child tax credit
- Tax break for commuters who use mass transit
- Deduction for qualified tuition and education-related expenses
- Itemized deduction for state and local sales tax in lieu of state income tax
- $250 deduction for teachers’ out-of-pocket expenses for school classroom expenses
- Increased standard deduction for married couples
- Limitation on itemized deductions for high-income taxpayers
- Above-the-line deduction for student loan interest
- $10,000 adoption credit and $10,000 income exclusion for employer assistance
- Increased dependent care credit
Cost estimates of the legislation provided by the Joint Committee on Taxation and the Congressional Budget Office (CBO) estimated that the bill would cost $858 billion dollars over 10 years when compared to tax rates that occurred before the Bush era cuts. These additional costs will be paid by borrowing. Those costs include:
|1.||Income tax reductions for the 10 percent bracket||$89.3 billion|
|2.||Income tax reductions for the 25 and 28 percent bracket||36.7 “|
|3.||Income tax reductions for the 33 and 35 percent tax brackets||60.8 “|
|4.||Retain the child credit at $1000||71.7 “|
|5.||Lower tax rates for dividends and capital gains||53.2 “|
|6.||American Opportunity credit & refundable child care credit||37.3 “|
|7.||Repeal phase-out of itemized deductions & personal exemptions||20.7 “|
|8.||Other numerous items, all under $5 billion individually||37.9 “|
|Subtotal – Temporary Personal reductions through tax year 2012||$407.6 billion|
|9.||Patching the Alternative Minimum Tax (AMT)||136.7 billion|
|10.||One-year, 2% reduction in the Social Security tax||111.7 “|
|11.||Extending unemployment compensation||56.5 “|
|12.||Estate & gift taxes||67.5 “|
|13.||Accelerated write-off of business investments||21.8 “|
|14.||Extension of numerous energy, business, and personal||56.0 “|
|credits that would otherwise be expiring|
|Total Cost||$857.8 billion|
The act does NOT alter expanded 1099 reporting which is scheduled to become effective for 2012.