While the changes in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act are significant, most are simply a preservation of the status quo – and many of the tax rates and policies the new legislation preserves go back to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
In addition to the maintenance of the current tax rates, the Tax Relief Act also provides for an alternative minimum tax (AMT) “patch,” a one-year payroll tax cut for workers, 100% bonus depreciation through 2011 and 50% bonus depreciation for 2012, a top federal estate tax rate of 35% with a $5 million exclusion, and more. President Obama signed the bill into law on Friday.
To help taxpayers and employers (most of whom are, it should be noted, also taxpayers), CCH has issued a Special Tax Briefing on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, providing insight and analysis on the bill.
Perhaps the most notable change (other than the preservation of the current income tax structure is the Act’s reduction of the employee-share of OASDI (Social Security tax) from 6.2% to 4.2% for wages earned in calendar year 2011, up to $106,800 (see IRS Releases Pay Withholding Change Guidance). Self employed individuals would pay 10.4% on self-employment income up to the threshold. The new payroll tax holiday is estimated to inject $120 billion into the economy in 2011.
Individual Tax Rates
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the individual income tax rates were scheduled to revert from 10, 15, 25, 28, 33 and 35% to 15, 28, 31, 36 and 39.6% after December 31, 2010. The Act now extends the current rates through December 31, 2012, for all taxpayers. CCH notes that, combined with the payroll tax cut that’s also part of this Act, “the extension of the individual rate cuts will give many people a significant increase in immediate dollars available to them in 2011 over what would have resulted without this bill. For example, an individual earning $50,000 in 2011 will see a $1,890 tax savings in combined income tax and payroll tax rate reductions over what was scheduled under the EGTRRA sunset (not that it will feel like a tax break – most of that is simply taxes that will not increase).
Qualified capital gains and dividends currently are taxed at a maximum rate of 15% (0% for taxpayers in the 10% and 15% income tax brackets) for 2010. The Act continues this treatment for two years. CCH notes that the law also provides for treating dividends received from a regulated investment company (RIC), real estate investment trust (REIT) and other qualified pass-through entities as qualified dividends for purposes of the reduced tax rates. Also extended are rules for collapsible corporations, the accumulated earnings tax and personal holding companies.
EGTRRA increased the dollar limitation for the adoption credit and the income exclusion for employer-paid or reimbursed adoption expenses to $10,000 (indexed for inflation). The Patient Protection and Affordable Care Act increased the credit and exclusion by another $1,000 (adjusted for inflation) for 2010 and 2011 and also made the adoption credit refundable. The Act extends the enhancements in EGTRRA to the credit and exclusion amount through December 31, 2012.
CCH notes that a taxpayer who incurs expenses to care for a child under age 13 or for an incapacitated dependent or spouse to work or look for work can claim a dependent care credit. EGTRRA temporarily increased the maximum amount of eligible expenses for the dependent care credit from $2,400 to $3,000 (from $4,800 to $6,000 for more than one qualifying individual). EGTRRA also raised the maximum credit from 30% to 35% of qualifying expenses and provided for a reduction in the credit, but not below 20 percent, by one percentage point for each $2,000, or fraction thereof, of AGI above a $15,000 threshold. The enhanced dependent care credit is now extended for two years.
Employer-provided Child Care
Under EGTRRA, employers may qualify for a tax credit if they make available child care to employees before 2011. The credit reaches $150,000 for qualified costs. The Act extends the credit through December 31, 2012.
Also included in the law, according to CCH are a series of business incentives, including provisions relating to: The Work Opportunity Tax Credit; 100 percent bonus depreciation; Code Sec. 179 expensing; research tax credit; small business capital gains; and "numerous business tax extenders".
The Special CCH Tax Briefing on the Tax Relief Act is available at http://tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf.