Hr 4853 Tax Cuts and Credits a Stopgap Patch

The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 HR 4853” passed the House of Representatives by a vote of 277 ayes to 148 nays (8 not voting) after it had passed the Senate 81 ayes to 19 nays.

According to the Associated Press in the “Washington Post,” some highlights are:

♦This tax compromise of 2010 will substantially affect the first paychecks in January of 2011 because of the reduction in FICA (social security) withholding. A worker earning $106,000 per year, or more, will have a net annual gain of $2,120, or $176.67 per month, at the new rate of 4.2 percent, which is down from 6.2 percent. A family with $50,000 annual income will take home an additional $1,000 per year. The self-employed will pay 10.4 percent of income for their personal contribution.

♦Paying for college, technical or trade school? Then you will be able to deduct the interest on student loans. And employers who provide education assistance get a tax exemption.

♦Middle class families climbing up into the higher bracket will have two years of relief from the Alternative Minimum Tax. This stopgap patch will apply to both 2009 and 2010 tax years, as filed in 2010 and 2011. About 20 million families will benefit from this measure.

♦If you sign the fronts of paychecks, instead of endorsing the back, a new 100 percent bonus depreciation in 2011, up to $125,000, for certain small businesses (under $500,000 income) and a capital investment credit for certain equipment and machinery (section 179) will lower taxes. These write-offs reduce to 50 percent in 2012.

♦Estates of the deceased will be exempt from taxation up to $5,000,000 (and subsequently an additional $5,000,000 for a spouse) and amounts over the basic exclusions will be taxed at a rate of 35 percent.

Most of the other “stuff” is a wide-ranging package of specific “line items” that extend Bush-era tax relief from 2001 and 2003. Primarily, all of the tax rates and income levels remain the same. There are some detractors and skeptics who do not view any extensions of the tax breaks already in place as  actual tax cuts. However, by any definition, if nothing had been done, then everyone’s taxes would have gone up . . . rather significantly.

Perhaps the two most important elements to be extended were the capital gains and dividends tax rates. They remain at 15 percent for 2011 and 2012. As a result, there is no advantage to sell assets in the last weeks of tax year 2010 to avoid a future increase in taxes.

Some of the provisions pick up tax breaks that expired in 2009. These are genuine tax cuts because they were already phased out. The compromise renews them for 2010 and 2011. Deductions such as the dependent care, tuition, expanded child care and earned income tax credits will continue. Similarly, the research and development tax credit for businesses will be renewed.

Generally, every US taxpayer benefited from this compromise because taxes did not go up on Jan. 1, 2011, and dozens of tax relief and tax credit programs were extended or renewed.

Specifically, everyone’s social security payroll contribution went down two percent.