With all the uncertainty about the status of individual income-tax rates, capital gains rates, and the future of the estate tax that prevailed for most of 2010, the tax planning environment has been a challenging one for taxpayers and their advisors. The late-year passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("2010 Tax Relief Act") brings a degree of clarity to the tax planning landscape, at least in the near term.
Key developments include the following:
- The existing federal income-tax rates for individuals - 10%, 15%, 25%, 28%, 33%, and 35% - will remain in place for 2011 and 2012. Before the 2010 Tax Relief Act, the rates had been scheduled to move to 15%, 28%, 31%, 36%, and 39.6%, beginning in 2011.
- The 15% and 0% tax rates on long-term capital gains will remain in place for 2011 and 2012. The top capital gains rate had been scheduled to rise to 20% in 2011 under prior law.
- Qualified dividends will continue to be taxed at a maximum rate of 15% (0% for those in the lowest two regular brackets) through 2012. After 2012, dividends are scheduled to be taxed as ordinary income. Higher income taxpayers won't be subject to reductions in personal exemptions and itemized deductions in 2011 or 2012. All taxpayers will receive the full benefit of their deductions .
- Employees and self-employed individuals will enjoy a two percentage point reduction in the Social Security tax rate imposed on their taxable wages and self-employment income in 2011.
- Businesses have new tax incentives to invest in machinery, equipment, and other qualifying assets, including a 100% write-off for eligible property purchased and placed in service after September 8, 2010. and before January 1, 2012.
- For 2011 and 2012, the top federal gift- and estate-tax rate is 35%, and the exemption amount (or "applicable exclusion amount") is $5 million (subject to potential inflation adjustment for 2012).