Major Tax Cuts - Highlights of the Recent Tax Relief Act

By now you've heard that Washington finally extended the Bush tax cuts that were scheduled to expire on December 31st - tomorrow!  This means the top rate stays at 35% (rather than 39.6%) and the rate on capital gains and qualified corporate dividends stays capped at 15%  (rather than 20%).  But the new law keeps taxes down for everyone, not just the highest earners.  If those Bush cuts hadn't been extended, the 10% rate would have disappeared and tax brackets would have increased faster for everyone.  So this extension of tax cuts applies to most everyone earning income! 

There's more good news, too.  The law also cuts the employee portion of social security and self-employment taxes by 2% (for 2011 only).  This will impact most everyone.  You will see this in your first paycheck of 2011.  The rate will move down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.  Note that the employer portion of the FICA taxes is not reduced. 

Additionally, the new law extends a list of popular tax breaks that were scheduled to expire: (1) it "patches" the Alternative Minimum Tax for two more years, thus protecting millions of Americans from AMT, (2) it extends the $1,000 Child Tax Credit and American Opportunity Tax Credit (for college tuition), (3) it expands the Earned Income Tax Credit, (4) it extends bonus depreciation and first-year expensing for businesses, and (5) it extends miscellaneous tax breaks for expenses like educator expenses, state and local taxes, and IRA distributions given directly to charity. 

The new law also restores the estate tax, but with only a 35% rate applying on estates over $5.0 million.

Now let's talk about what it all means. 

In short term, your taxes will be lower.  However, the reality is that the law's provisions will last for two years at most.  That means Washington will have to fight it out all over again... with a divided Congress... in a presidental election year... with another $2 trillion or so added to the national debt (on top of the $13.9 trillion that's already there!).  If the economy continues to pick up over the next two years, there may be enormous pressure to increase taxes.  This will make tax planning even more important over this period. 

So if you don't have a plan, be proactive and take action now.  Contact us for a tax coaching session to be sure you have everything covered.