Articles: Three key breaks in new tax law
The new tax legislation signed late last year—the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010—includes these three important tax breaks:
1. Income tax rates: The new law preserves the “Bush tax cuts” for two years. Under prior law, the lowest 10% tax rate for individuals was scheduled to vanish after 2010, while the top two rates increased to 36% and 39.6%. Now the 10% rate has been extended, and the two highest tax rates remain at 33% and 35% through 2012. The new law also continues tax relief from the “marriage penalty” for joint filers.
Significantly, the new law retains favorable tax treatment for longterm capital gains and qualified dividends through 2012. Long-term capital gains and qualified dividends will continue to be taxed at a maximum tax rate of 15% (0% for those in the regular 10% and 15% tax brackets). Without the changes, the maximum tax rate for long-term capital gains would have increased to 20% (10% for those in the 15% tax bracket). Qualified dividends would have been taxed at ordi- nary income rates.
Note: A portion of your capital gains may be taxed at the
0% rate even if you’re in a high tax bracket. Seek professional guidance.
2. Payroll tax holiday: The new law creates a payroll tax holiday for one year. It reduces the Social Security tax paid by an employee by 2% for 2011.
Normally, you must pay a Social Security tax of 6.2% on wages up to annual “wage base” ($106,800 for 2011). The new law effectively cuts the Social Security tax on these wages to 4.2%. Thus, if you earn $100,000 in salary in 2011, you will save $2,000.
A comparable provision applies to self-employment tax paid by self-employed individuals. The regular 12.4% Social Security tax is reduced to an effective 10.4% rate for 2011.
3. Estate-tax relief: The federal estate tax was repealed for 2010 but was set to return in 2011 with a vengeance. As opposed to a $3.5 million estate-tax exemption and a top estate-tax rate of 45% in 2009, the exemption was scheduled to be limited to $1 million with a top estatetax rate of 55%.
The new law overhauls the rules for 2011 and 2012. It authorizes a $5 million exemption with a top 35% tax rate. The new law also replaces modified carryover basis rules with rules allowing a stepup in basis to the value of assets upon a decedent’s death, permits portability of estate-tax exemptions between spouses and reunifies the estateand gift-tax systems.
Note: An executor may choose to apply the new rules to the estate of a decedent dying in 2010. This requires a careful analysis.
Due to the new law changes, this is a good time to revisit your estate plan. Obtain assistance from an estate-planning expert.
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