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A Peek Inside the 2010 Tax Bill: What It Means for Investors

We agonized until almost the end of 2010 waiting to find out what Congress would do concerning taxes. They responded late in the month of December with the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Let’s look at some of the highlights affecting individuals.

 

Tax rates in existence in 2010 were extended through 2012. That included a two-year extension of zero or 15% rate on capital gains and dividends and a two-year continued repeal of the Personal Exemption Phase-out and itemized deduction limitation.

For 2011 and 2012 there is a 35% top rate and a $5 million exemption for estate, gift and generation-skipping transfer tax. An unused exemption may be transferred to a surviving spouse, and the exemption amount is indexed for inflation in 2012. These are major changes from the old tax law. For estates of individuals who died in 2010, there is a choice of using these rates or the rules in effect for 2010.

There is a temporary cut in FICA for 2011 from 6.2% to 4.2% for employees and for the self-employed from12.4% to 10.4%.

IRAs: Distributions to Charities

There are some extensions of previous provisions that had expired, to be effective for 2010 and 2011 taxes. One of the most important for those with IRAs who are taking required minimum distributions is the ability to make tax-free distributions to charity up to $100,000.

Education Incentives

The following Education Incentives were extended through 2012:

  • Expanded student loan interest deduction.
  • Expanded Coverdell accounts and definition of education expenses.
  • Expanded exclusion for employer-provided American Opportunity Tax credit of up to $2,500 for tuition expenses.
  • Exclusion from income of amounts received under certain scholarship programs.

Alternative Minimum Tax

When the alternative minimum tax was initiated, it was meant to affect only people with very high incomes. Because it was never indexed for inflation, over the years it was affecting taxpayers that it was never intended to include. The 2010 bill included a “patch” for 2010 and 2011 to temporarily correct this situation.

There are tons of other details in this bill. If you want to explore it in more detail, please visit the Information Center posting about the bill on the IRS website.

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Posted in Financial Education, Industry News.

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