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Bridget Foreman: What the Tax Relief Act Means for You

New law extends tax cuts and includes provisions for other relief and credits

As many of you were probably glued to the TV sets this past week awaiting Congress’ decision on the Bush-era tax cuts, you saw that President Barack Obama signed the bipartisan tax package into law on Friday and ended the uncertainty — at least until 2012.

This much-debated tax bill passed the Senate early last week with an 81-19 vote, and later passed through the House of Representatives 277-148.

In an effort to prevent a big New Year’s Day tax hike for millions of Americans, Congress inevitably made the decision to compromise and pass the legislation to President Obama. This new law, which extends the Bush-era tax cuts and includes other provisions for payroll tax relief, unemployment benefits as well as various tax credits, hopefully will help stimulate the economy and allow Americans to keep more of their money.

Some of the highlights of the Tax Relief Act include:

» 1. Extension of reduced individual tax rates: On Jan. 1, 2011, tax rates were set to increase but instead will remain at the current rates of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent through Dec. 31, 2012.

» 2. One-year payroll tax cut: For 2011 only, workers will get a 2 percent break on their payroll tax. Instead of paying 6.2 percent, they will have to pay only 4.2 percent of Employee OASDI wages. Self-employed taxpayers receive a reduction in self-employment tax from 12.4 percent to 10.4 percent.

» 3. Continuation of reduced capital gains/dividend tax rates: The new law extends capital gains and dividend rates of 15 percent for most taxpayers, and zero tax for low-income taxpayers (10 percent and 15 percent income tax brackets) through Dec. 31, 2012.

» 4. Estate tax relief: Under the new legislation, the maximum estate tax rate will be lowered to 35 percent with an exemption level of $5 million for single individuals and $10 million per couple.

» 5. Extension of unemployment benefits: Those who are unemployed will get a 13-month extension of the deadline to file for additional unemployment benefits.

» 6. 100 percent bonus depreciation for businesses: Qualified investments made after Sept. 8, 2010 and before Jan. 1, 2012 can receive 100 percent bonus depreciation, increased from the previous 50 percent amount.

» 7. Higher exemption amounts for AMT (Alternative Minimum Tax): For 2010, the AMT exempt income levels increase to $47,450 for individuals and $72,450 for married filing jointly, and will increase again for 2011.

» 8. Various extended tax credits: Many tax credits have been extended and/or expanded, such as the $1,000 child tax credit, the earned income tax credit, the American Opportunity Tax Credit and various energy credits.

While this list is certainly not comprehensive, it encompasses a great deal of how this new law will impact the majority of taxpayers. The CCH Tax Briefing states that “for most individuals, the most immediate impact of the new law will be the payroll tax cut and the extension of the reduced individual income tax rates.”

There are many more aspects of this new law and ways in which it may help reduce your tax bill.

To find out more about the 2010 Tax Relief Act and how it may affect your bottom line, be sure to consult your tax adviser. You don’t want to miss out on any of the benefits of this new legislation. For questions and assistance, call Bartlett, Pringle & Wolf LLP at 805.963.7811. We’re happy to help!

— Bridget Foreman represents Bartlett, Pringle & Wolf LLP.

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