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Understand the New Tax Relief Package

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. How many more acronyms (EFTRRA or JCTRRA) do we have to know? This Act, in essence, is an extension of the Bush-era tax cuts for two years. Also, the legislation includes a payroll tax holiday for 2011 and a change in the exemption amount and maximum tax rate for estate taxation. The Act incorporates many business and individual extensions of the so-called “annual extenders.”  Here are some highlights:

INDIVIDUAL TAX HIGHLIGHTS

  • Individual Tax Rates remain at 2010 levels –these lower rates will be in effect until 2012
  • Repeal of the “phaseout” for personal exemptions and itemized deductions for taxpayers with an Adjusted Gross Income above certain levels
  • Modifications to child tax credit:  The Act keeps the child tax credit amount at $1,000 per child, extends the allowance against the regular tax/AMT and maintains the refundability through 2012.
  • Expansion of adoption credit and adoption assistance programs:  The credit increased to $13,170 (adjusted for inflation, the 2011 amount is $13,360).
  • Dependant care credit:  The Act provides that the dependent care credit is extended so eligible expenses of $3,000 for one qualifying child/disabled dependent and $6,000 for two or more children/disabled dependents creates a tax credit for an additional two years, through 2012.
  • Elimination of marriage penalty :  The Act extends the marriage penalty relief for the standard deduction and the tax rate schedules for an additional two years, through 2012.
  • Marriage penalty relief for earned income credit: This will insure that more families qualify for the earned income credit and married couples are not penalized.
  • Modifications to education individual retirement accounts (now Coverdell education savings accounts): Coverdell education savings accounts are tax-exempt savings accounts used to pay the higher education expenses of a designated beneficiary. EGTRRA increased the annual contribution amount from $500 to $2,000 and expanded the definition of education expenses to include elementary and secondary school expenses. The Act extends the changes to Coverdell accounts for an additional two years, through 2012.
  • Extension of exclusion for employer-provided educational assistance: An employee may exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance.  Now both under-graduate and graduate education tuition can be excluded. The Act extends the changes for an additional two years, through 2012.
  • Elimination of 60-month limit and increase in income limitation on student loan interest deduction: Certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction for such interest expenses up to $2,500. The 60-month limit was eliminated through 2012.
  • Deduction for higher education expenses: EGTRRA created an above-the-line deduction for qualified tuition and related expenses. Currently, subject to income phase-outs, taxpayers are allowed to deduct a maximum of $4,000.
  • Reduction in capital gains rates for individuals; repeal of 5-year holding period requirement:  The Act extends the lower capital gains rates of 0% or 15% for all taxpayers for an additional two years, through 2012.
  • Dividends of individuals taxed at capital gain rates: JGTRRA lowered the dividend rates so that they were taxed the same as capital gains.  The Act extends the current dividends rates for all taxpayers for an additional two years, through 2012.
  • American Opportunity Tax Credit: The 2009 ARRA created the American Opportunity Tax Credit as a temporary replacement of the HOPE credit. Generally, the credit is for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. The credit is allowable for the first four year of post-secondary education. Under this tax credit, taxpayers receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25% of the next $2,000 of tuition and related expenses paid during the taxable year. Further, 40% of the credit is refundable. However, the credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). The Act extends the American Opportunity Tax Credit for an additional two years, through 2012.
  • Child Tax Credit: Generally, taxpayers with income below certain threshold amounts may claim the child tax credit to reduce federal income tax for each qualifying child under the age of 17. The 2001 EGTRRA expanded the refundability of the child tax credit so that those who owe little or no tax still get a benefit.
  • Earned Income Tax Credit: The 2009 ARRA increased the earned income tax credit to 45% of a working family’s first $12,570 of earned income for families with three or more children and increased the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children). The Act extends for an additional two years, through 2012, the 2009 ARRA provisions that increased the credit for families with three or more children and increased the phase-out.