As you may have heard, Congress recently passed a bill termed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Relief Bill”). This Tax Relief Bill has a wide impact on the federal taxes that you and I pay, even if we won’t necessary notice come tax time this year. The reason we may not notice is the main point of the Tax Relief Bill was aimed at extending previous tax cuts and maintaining current tax rate levels and a variety of credits.
Perhaps the biggest impact of the Tax Relief Bill is its extension of the “Bush Tax Cuts.” The Bush Tax Cuts were two pieces of legislation passed in 2001 and 2003 that, among other things, lowered the federal tax rates across the board. Had the tax cuts been allowed to expire, as they were set to do at the end of 2010, the tax rates would have reset, increasing the top rate back to 39.6% and completely eliminating the 10% tax rate. The tax rates are now in place until the end of 2012.
The Bush Tax Cuts also cut the tax on capital gains and dividends from the ordinary income tax rate you paid on all income to a maximum of 15% for individuals in a tax bracket greater than 15% and to 0% for those in the 10% and 15% tax brackets. This limitation on capital gains and dividend taxation will be around for at least another two years.
Another big impact of the Tax Relief Bill is a reduction of social security tax for employees and self-employed individuals. Currently employees pay 6.2% on their earnings (withheld from their paycheck) and self-employed individuals pay 12.4% on net income. The Tax Relief Bill reduces these amounts to 4.2% and 10.4%, respectively. For employees, this means that you should see extra in your paycheck for all of 2011.
Several of the tax credits that were affected are the extension of the American Opportunity Tax Credit (provided for higher education) for two years, the Child Tax Credit is now refundable for two years, and the Earned Income Credit has been expanded to include more families.
The IRS has announced an unintended consequence of the passing of the Tax Relief Bill. They have indicated that certain filers, particularly those who file Schedule A to claim itemized deductions, will not be able to file as early this year due to additional time needed to update the appropriate forms. They have not set a particular date; however, the IRS has indicated that the forms should be ready sometime in mid-February. We will post more information once we know when the forms will be ready.