Temporary Extension of Tax Relief for 2011 and 2012

Special Publications | Taxes

Saturday, January 01, 2011

Extension of the Bush income tax cuts.  This provision extends all individual income tax cuts (10%, 25%, 28%, 33%, and 35% tax brackets) through 2012.   

Extension of the capital gains and dividend rates.  This proposal extends the current capital gains and dividends rates for all taxpayers through 2012.  The capital gains and dividend rates for taxpayers below the 25% bracket is zero.  For those in the 25% bracket and above, capital gains and dividend rates are 15%.  

Extension of the modified child tax credit.  The Bush tax cuts increased the child tax credit from $500 to $1,000.  The amount that may be claimed as a refund is 15% of earnings above $10,000.  This provision extends the child tax credit through 2012.

Extension of marriage penalty relief.  The proposal extends the marriage penalty relief for the standard deduction, the 15% bracket, and the Earned Income Tax Credit through 2012. 

Extension of the American Opportunity Tax Credit. Under this tax credit, taxpayers receive a 40% credit based on the first $2,000 of tuition and related expenses and 25% of the next $2,000 of tuition and related expenses paid during the taxable year.  This provision extends the American Opportunity Tax Credit through 2012.

Two-year Alternative Minimum Tax patch.   The Alternative Minimum Tax (AMT) patch expired December 31, 2009.  This provision makes the patch effective for 2010 (retroactively) and 2011.  This provision increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly).  It also allows the nonrefundable personal credits against the AMT. 

Temporary estate, gift and generation skipping transfer tax relief.  The Bush Tax Cuts phased out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010.  This provision sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35% for the estate, gift, and generation skipping transfer taxes for two years, through 2012.  The exemption amount is indexed to inflation beginning in 2011.

 Extension of bonus depreciation.  Businesses have generally been required to recover the cost of capital expenditures over time according to a depreciation schedule.  Beginning January 1, 2008, through December 31, 2009, Congress allowed an additional depreciation deduction allowance equal to 50% of the cost of the depreciable property placed in service in those years.  The temporary increase in the depreciation deduction allowance was extended through December 31, 2010.  The bill extends and temporarily increases this bonus depreciation provision for investments in new business equipment.  For investments placed in service after September 8, 2010, and through December 31, 2011, the bill provides 100% bonus depreciation.  For investments placed in service after December 31, 2011, and through December 31, 2012, the bill provides for 50% bonus depreciation.   The provision also allows taxpayers to elect to accelerate some AMT credits in lieu of bonus depreciation for taxable years 2011 and 2012.  

Other Tax Changes: 

Temporary reduction in employee-paid payroll taxes. Under current law employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4% Social Security self-employment tax on income up to the same threshold.   The bill provides a payroll/self-employment tax holiday of two percentage points during 2011.  This means employees will pay only 4.2% on wages and self-employed individuals will pay only 10.4 percent.  

Deduction of state and local general sales taxes. The bill extends for two years (through 2011) the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes. 

Extension of tax-free distributions from individual retirement plans for charitable purposes. The bill extends through 2011 the provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year. The bill allows individuals to make charitable transfers during January 2011 and treat them as if they were made during 2010.

 Premiums for mortgage insurance deductible as interest that is qualified residence interest.  Under current law, a taxpayer may itemize the cost of mortgage insurance on a qualified personal residence. The deduction is phased-out at a rate of 10% for each $1,000 by which the taxpayer's adjusted gross income (AGI) exceeds $100,000.  Thus, the deduction is unavailable for a taxpayer with an AGI in excess of $110,000.  The bill extends this provision through 2011.    

Exclusion of small business capital gains.  Generally, non-corporate taxpayers may exclude 50% of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75%. For stock acquired after September 27, 2010, and before January 1, 2011, the exclusion is 100% and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation where gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and that meet a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of 10 times the taxpayer's basis in the stock or $10 million of gain from stock in that corporation. The provision extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012, and held for more than 5 years.