In December, President Barack Obama and Congress enacted the 2010 Tax Relief Act. Without this Act, many tax cuts which were originally established during the George Bush Presidency would have expired and Americans would have paid a significantly higher amount of tax in a number of areas. Some of the highlights of this Act are as follows:
- Income Tax. The current income tax rates will remain unchanged for 2011 and 2012, with a top income tax rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
- Payroll/Social Security and Self-Employment Taxes. Currently, the government receives 6.2% of an employee’s paycheck for social security. Under the Act, that percentage drops to 4.2% in 2011 thereby effectively increasing an individual’s take-home pay. For example, an individual earning $50,000 will receive an annual take-home pay increase of $1,000. For those self-employed individuals, the rate will be reduced from 12.4% to 10.4%.
- Child Tax Credit and Higher Education Credit. The $1,000 child tax credit and the higher education tax credit which were set to expire at the end of 2010 will be extended for two years.
- Unemployment Benefits. The Act extends unemployment benefits for millions of Americans who are currently unemployed through the end of 2011. This extension applies to workers who have been laid off for more than 6 months and less than 99 weeks.
- Estate and Gift Tax. No federal estate tax exists on estates of individuals who pass away in 2010. In 2011, the federal estate tax was supposed to be reinstated and estates with assets exceeding $1,000,000 would be taxed with a top tax rate of 55%. Under the Act, for 2011 and 2012, the exemption amount is increased to $5,000,000 per person and the highest rate is 35%. In addition, for married couples, if one spouse does not use his or her entire $5,000,000 exemption at death, then the remaining portion of that exemption can be used by the surviving spouse when he or she passes away. For example, if a husband passes away and only uses $3,000,000 of his exemption, upon the wife’s death, her estate can use his remaining $2,000,000 exemption, plus her own $5,000,000 exemption, effectively protecting $7,000,000 of assets from federal estate tax on her death.
Additionally, the Act unifies the gift tax exemption with the estate tax exemption. The lifetime gift tax exemption is increased from $1,000,000 to $5,000,000 for 2011 and 2012 as well. This means that for 2011 and 2012, an individual can gift assets worth up to $5,000,000 before paying any gift tax.
Please note that this Act does not affect the Ohio estate tax law. The Ohio law still provides for a $338,333 estate tax exemption with a top Ohio estate tax rate of 7%. Therefore for an individual with a net estate of $500,000 at death, the estate will not pay any federal estate tax, but will still pay $9,700 in Ohio estate taxes.
- Alternative Minimum Tax (AMT). The AMT is another type of tax which is required to be paid to the IRS. The Act increases the exemption amount for individuals, couples, and corporations. The increased exemption effectively reduces the number of taxpayers subject to the AMT and the amount of AMT paid by those taxpayers subject to the AMT, potentially saving thousands of dollars.
The hope in Washington is that all of these items in the Act will provide taxpayers with more disposable income to spend or invest which will stimulate the economy. Please contact your tax advisor and estate planning attorney for more detailed information on all of these items in the 2010 Tax Relief Act.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663