Income Tax Rates Will Remain…for now
Bust Tax Cuts Extended
After weeks of heated debate and controversy, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 on Dec. 17. And while some may be concerned about the cost of the act, just about everyone will benefit. Here are some of the key changes.
Income tax rates hold steady
The central feature of the Tax Relief act is a two year extension of the “Bush tax cuts.” Individual income tax rates ranging from 10% to 35% had been scheduled to return to their previous levels (from 15% to 39.6%) in 2011. The act extends the lower rates through Dec. 31, 2012. It also increases alternative minimum tax (AMT) exemptions that would otherwise have decreased substantially for 2010 and 2011.
Payroll taxes reduced
For 2011 only, the act reduces the employee’s share of Social Security taxes from 6.2% to 4.2% on earnings up to the taxable wage base ($106,800 in 2011). So, for example, an employee who earns $100,000 this year will save $2,000 in payroll taxes.
The act also cuts the Social Security portion of self-employment taxes from 12.4% to 10.4%. (This doesn’t reduce a self-employed individual’s deduction for the employer’s share of these taxes, however.)
Capital gains and dividends rates extended
The 15% tax rate for long-term capital gains and qualified dividends (0% for taxpayers in the 10% and 15% brackets) was scheduled to expire at the end of 2010. Without new legislation, the capital gains rate would have risen to 20% (10% for taxpayers in the 15% bracket) and qualified dividends would again have been taxed at ordinary-income rates as high as 39.6%. The act extends the lower rates through Dec. 31, 2012. This means the pressure is off (for now) to cash in appreciated investments before rates go up. In addition, gifting appreciated securities to children (if not subject to the “kiddie tax”) or other family members in the bottom two tax brackets continues to be a viable strategy.
Estate and gift tax changes
Without Congressional action, the estate tax would have come back in 2011 (after a one-year repeal) with a top rate of 55% and an exemption.
Consult with our NH and Merrimack Valley MA CPA Firm, Pappalardo & Merrill on your individual accounting needs