Tax Relief is a “Good Thing” for the Economy in 2011
By Philip O. Johnson, CFP®
In December, President Obama signed into law the long awaited Tax Hike Prevention Act. The goal of this law is to give tax relief and help create jobs, and it extends many of the Bush-era individual and capital gain/dividend tax cuts for two more years.The bill’s total cost to the US Treasury is projected to be $858 billion. Individual taxpayers will receive the bulk of the benefit as the bill targets some $700 billion in tax breaks toward them.1 Taxpayers should enjoy these benefits while they can as some will expire at the end of this year, and most of the provisions at the end of 2012.The passage of this Act now gives individuals and their financial advisors some certainty in financial and estate planning over the next two years. Be sure to consult with your tax advisor in making sure you take advantage of all credits and tax incentives to which you are entitled.If you have any questions regarding how this law impacts your personal finances, please don’t hesitate to give us a call.
| Individual Income | Current rates remain in place by extending the Bush-era tax rates for 2011 and 2012. Top rate is 35%. |
|---|---|
| Capital Gains | Long term capital gains and dividends are currently taxed at a maximum rate of 15%, and they will remain at this historic low for two more years. This applies to gains on assets held longer than one year. |
| Dividends | Current rates are extended, with the top rate for qualified dividends (most stocks which have been held longer than two months) remaining at 15%. |
| Payroll Tax | Workers’ payroll (FICA) tax is reduced from 6.2% to 4.2% up to $106,800. This applies to 2011 only. Self-employed individuals pay a combined rate of 13.3%, down from 15.3%. |
| Alternative Minimum Tax | The Tax Act contains a two year patch for the AMT. This is retroactive to January 1, 2010, thus reducing the AMT burden for tax years 2010 and 2011. |
| Estate and gift tax | For 2011 and 2012, the maximum estate tax rate is 35% with an exemption amount of $5 million. |
| Marriage Penalty | This Tax Act eliminates the “marriage penalty” for 2011 and 2012. |
| Extenders | Law includes an additional standard deduction for real-estate taxes, state and local sales-tax deduction for itemizers, transfer of IRA assets to charities by those over age 70 ½, and a deduction for teacher’s expenses for 2010 and 2011. |
| Unemployment Benefits | Federal benefits would be extended for 13 months at their current level. This is only for this year. |
| Tax Credits | The Tax Act extends the $1,000 child credit (with phase-outs as before). It expands the Earned Income Tax Credit for larger families and married couples. Extends the Dependent Care Credit as well. |
Source: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
1) Tax Relief / Job Creation Act of 2010