On December 17, 2010, President Obama signed into law the Tax Hike Prevention Act of 2010. With its passage, the Bush-era tax cuts that had been scheduled to expire at the end of 2010 will remain in effect for two more years. The following is a quick summary of the key provisions in the new law.
Extended income tax rates
The tax bracket rates that had been implemented earlier this decade and had been scheduled to expire at the end of this year were extended for two more years. The bracket rates are: 10%, 15%, 25%, 28%, 33%, and 35%. Also, itemized deductions and personal exemptions for high-income taxpayers will be fully allowed instead of being partially phased out.
More than 20 million taxpayers would have been subject to the stealthy Alternative Minimum Tax. The amount of income exempt from this tax was extended and inflation-adjusted. Also, certain non-refundable credits will continue to be allowed to reduce regular tax and AMT.
Extended investment tax breaks
Long-term capital gains rates were extended for two years. This means most people will pay a maximum tax rate of 15% on qualified capital gains and dividends. Lower-income taxpayers will continue to enjoy a 0% tax rate on capital gains and dividends.
Marriage penalty relief
Married couples will continue to see relief from the so-called “marriage penalty” for two more years. This means they will enjoy a basic standard deduction which is twice the amount for a single individual. Also, the 15% tax bracket had been expanded to help offset this penalty, and that provision was also extended two more years.
Expanded child tax credit
The child tax credit had been scheduled to drop from $1,000 per child to $500 per child. The higher credit amount was extended for two more years. Also, the refundable portion of the child tax credit was extended for two years.
Expanded college credit
The recently expanded HOPE college tuition credit, renamed the American Opportunity tax credit, had also been scheduled to expire at the end of 2010. This “super-HOPE” tuition credit was extended for two more years.
Smaller estate tax
The federal estate tax had expired for taxpayers dying on or after January 1, 2010. A cumbersome “carry-over basis” regime had replaced the estate tax. The new law restores the estate tax, but with a surprisingly-high exclusion of $5 million and a tax rate of 35%.
Social Security tax paycheck break
Wage-earners had been allowed a Making Work Pay credit against income tax of either $400, or $800 for married couples. This was set to expire at the end of 2010. In its place, a one-year, two-percent reduction in OASDI social security tax was added. This is expected to inject about $120 billion into the economy in 2011.
Extension of individual tax breaks
A number of individual tax breaks that had been scheduled to expire were extended. These include:
State and local sales tax deduction
Higher education tuition deduction
Charitable contributions from IRA’s
$250 above-the-line teacher’s classroom expense deduction
Deduction of mortgage insurance premiums
Student loan interest deduction
Earned Income Tax Credit enhanced credit
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