What the new tax legislation actually means for you

Proper tax planning and good tax strategy will help reduce your current tax bill and gain a little more control over your financial destiny. While many people don’t think about their taxes until March or April, it’s a good idea to start now.

The recently enacted 2010 Tax Relief Act gives 95 percent of working Americans a tax cut. The new law also gives taxpayers some certainty in tax planning through 2012 concerning individual income tax rates, capital gains and dividend tax rates and estate taxes. The provisions are temporary, however, and the new law defers the ultimate fate of Bush-era tax cuts to 2012, a presidential election year. Here’s a look at some of the specific provisions:

Payroll tax cut: The most immediate benefit of the new law is the 2 percent payroll tax cut for employees, which puts money in their pockets now. The law reduces the Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid.
Self-employed individuals pay 10.4 percent on income up to $106,800 instead of 12.4 percent.

Retained individual tax rates: Individual income tax rates had been scheduled to revert from their current levels of 10 percent to 35 percent to 15 percent to 39.6 percent after Dec. 31, 2010. The law extends all individual rates at current levels through Dec. 31, 2012.

Retained capital gains and dividends tax rates: Qualified capital gains and dividends were taxed at a maximum rate of 15 percent  for 2010. The law continues this treatment for two years, through Dec. 31, 2012.

100 percent bonus depreciation: The act boosts 50 percent bonus depreciation to 100 percent for qualified investments made after Sept. 8, 2010 and before Jan. 1, 2012. The act also makes 50 percent bonus depreciation available for qualified property placed in service after Dec. 31, 2011 and before Jan. 1, 2013. This provision is one of the most expansive for businesses. Unlike Code Section 179 expensing, it’s not limited to use by smaller businesses or capped at a certain dollar level. Bonus depreciation is not limited by the size of a taxpayer’s investments in qualified property and it can generate net operating losses. Bonus depreciation, however, applies only to new property.

Section 179 expensing: The 2010 Small Business Jobs Act also increased the Code Section 179 dollar and investment limits to $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011.

Estate tax compromise: The act raises the estate tax exemption for decedents who die after Dec. 31, 2009. The maximum estate tax rate is 35 percent with an exclusion amount of $5 million. This new estate tax regime is itself temporary, however, and scheduled to sunset on Dec. 31, 2012. For estates of decedents dying in 2010, executors may elect to have the 2010 rules apply with no estate tax, but modified carryover basis.

Portability of estate tax exclusion: The act provides for “portability” between spouses of the maximum exclusion. Portability allows a surviving spouse to elect to take advantage of the unused portion of the estate tax exclusion of his or her predeceased spouse and provides the surviving spouse with a larger exclusion amount. With the proper election and careful estate planning, married couples can effectively shield up to $10 million from estate tax by providing that each spouse maximize his or her $5 million exemption under the act.
Gift taxes: For gifts made in 2010, the act provides that gift tax is computed using a rate schedule having a top tax rate of 35 percent and a maximum applicable exclusion amount of $1 million. For gifts made after 2010, the gift tax is reunified with the estate tax with a top gift tax rate of 35 percent and a maximum applicable exclusion amount of $5 million.

Other deductions and credits: Numerous other deductions and credits were also extended, including minor, but temporary, relief to the alternative minimum tax.

Start out 2011 with a strategy that will allow you to keep more of what you earn and give you peace of mind.

The information provided in this column is for informational purposes and does not constitute an accountant-client relationship. We assume no liability or responsibility for any assumptions made in the content of this column.  Any U.S. federal tax advice contained in this article is not intended to be used for the purpose of avoiding penalties under U.S. federal tax law. We recommend you call our firm before implementing any tax techniques discussed in this column.