On December 17, 2010, President Obama signed into law the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (the “Tax Relief Act”). The Tax Relief Act is an extensive tax package that includes, among other items, an extension of the Bush-era tax cuts for an additional two years, estate tax relief, a 2% cut in employee-paid payroll taxes and self-employment taxes for 2011, new incentives for businesses to invest in machinery and equipment, and a myriad of retroactively resuscitated and extended tax breaks for businesses and individuals. The overall theme of the Tax Relief Act; however, is its temporary nature. The vast majority of the provisions in the Tax Relief Act are only effective for the next two years, pushing the ultimate fate of the Bush-era tax cuts into 2012, the next presidential election year. Some of the key elements of the Tax Relief Act are discussed in detail below.
INDIVIDUAL INCOME TAX INCENTIVES
For the vast majority of individual taxpayers, the most significant aspects of the Tax Relief Act are (I) the extension of the reduced individual income tax rates; (ii) the extension of the reduced capital gains and qualified dividend tax rates; and (iii) the 2% payroll tax cut. The extension of the reduced tax rates, combined with the payroll tax cut, is expected to put real dollars in the hands of many Americans in 2011, beyond what would have resulted without the passage of the Tax Relief Act. That being said, the overall revenue cost of the individual tax cuts in the Tax Relief Act is approximately $186 billion.
- Reduced Individual Income Tax Rates. Under the Tax Relief Act, the tax rate schedules for individuals will remain at 10%, 15%, 25%, 28%, 33%, and 35% through 2012. Prior to the passage of the Tax Relief Act, these rates were scheduled to rise for tax years beginning in 2011 to 15%, 28%, 31%, 36%, and 39.6%. Nonetheless, President Obama has already announced that he will make the rate reduction for the two highest individual income tax brackets an issue in the 2012 presidential campaign.
- Reduced Capital Gains and Qualified Dividend Rates. The Tax Relief Act extends the reduced tax rates applicable to capital gains and qualified dividends, which were the hallmark of the Bush-era tax cuts, for an additional two years. Under Section 102 of the Tax Relief Act, adjusted net capital gain and qualified dividends will continue to be taxed at a rate of 15% through 2012. Without the Tax Relief Act, the capital gains rate would have increased to 20% for tax years beginning in 2011 and qualified dividends would have been subject to tax at ordinary income tax rates.
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