New Tax Law: What You Need to Know

Updated, Friday 12/17/10:  The House passed the bill that was agreed upon by President Obama and Senate. It appears that no changes were made to the bill that the Senate passed. President Obama is to sign it on Friday. The following is a summary of the legislation, but is not intended to cover all the provisions of the new law.
Tax rates:  The current rates will remain in effect for the next two years, 2011 and 2012. There will be no tax increase, even for taxpayers in the top tax bracket of 35% (for ordinary income) for the next 2 years. Note that these tax rates are not permanent, as the law only covers 2011 and 2012.

Capital gains and dividend tax rates:  Current capital gains and dividends rates of 15% remain for high income taxpayers. For those below the 25% tax bracket, the capital gains rate which is currently at 0% rate will remain.

Estate tax rates:  Major Change:  This has been the major point of contention in negotiations this week. The new law will have a $5 million per person exemption and $10 million per couple.  This is a higher level than most would have expected months ago. The exemption amounts are indexed, beginning in 2012.  The top estate tax rate will be 35% for 2011 and 2012.

The law also allows planning opportunities to shift/allocate assets between a couple, upon the first to die, to maximize the use of the full exemption for each individual.

Payroll Tax Reduction:  For 2011 only, the 6.2% social security tax will be reduced to 4.2%, for the first $106,800 of wages, which are subject to this tax. This will provide up to $2,136 reduction in social security taxes for employees whose wages are $106,800 or higher. A couple who each earns at or above $106,800 will save approximately $4,300.  Note that employers will still need to pay in the employer portion of social security taxes based on the 6.2% amount.

Alternative Minimum Tax:  Technical changes were made, so that the AMT will remain at same level as in 2010. This still has a great impact on many middle-high income taxpayers.

Addition to the Deficit:  The bill did not provide for any federal spending cuts. The bill is projected to cost the Treasury $860 Billion over the next 10 years. This does not include the cost of the 13 month extension of unemployment benefits.

Business:  As for individuals, a number of extensions of items for a year or two, through 2012, such as increased depreciation expense and research and development expense credits.

Not included:  There was no change to how private equity and hedge fund executives will be taxed. Most will continue to earn at capital gains rates, not as ordinary income rates, as once thought might be passed. Congress failed to pass any changes related to issuance requirements of Form 1099s, which will be greatly increased from provisions of the health care bill passed earlier in 2010 (don't ask how those are tied together!) Hopefully, some of the Form 1099 rules will be modified in 2011.

Sources:  Wall Street Journal and New York Times, December 13-17