With the New Year comes new recently signed tax legislation that provides more clarity…at least for the next couple of years.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law on December 17, 2010. It extended existing federal income tax rates as well as tax rates on long-term capital gains and qualifying dividends for two additional years. It also includes a patch for alternative minimum tax that is good for 2010 and 2011. We’ve already seen with some clients how this will translate into thousands of dollars of savings on their tax liability.
There is more clarity with estate tax, albeit temporarily. For 2011, the estate tax exemption amount will be $5 million per person (and will be indexed for inflation in 2012), and the top estate and gift tax rate for these years will be 35%. The gift tax (reunified with the estate tax) now has a $5 million dollar exemption amount and the generation-skipping transfer tax, now with a $5 million exemption effective January 1, 2010, has a 35% tax rate for 2011 and 2012. In addition, for 2011 and 2012, when one spouse dies, any unused portion of that spouse’s estate tax exemption amount may be transferred to the surviving spouse.
For this year only, the employee portion of the Social Security retirement component of FICA tax is reduced by 2%. Instead of paying 6.2% of covered wages up to the taxable wage base ($106,800 in 2011), this rate will be reduced to 4.2%. Self-employed individuals will also see this reduction—instead of normally paying 12.4% for the Social Security portion of their self-employment taxes, they will pay at the rate of 10.4% for 2011.
For higher-income individuals itemized deductions and personal and dependency exemptions will not be reduced; for individuals in the 10% or 15% marginal income tax bracket, a special 0% rate on long term capital gains will generally continue to apply.
Please contact your financial planner and see how these changes and other provisions of the Act impact you.