Analyzing the Tax Deal

President Obama signed a tax bill into law yesterday (Friday) that gives us some clarity on what the tax situation will be for 2011 and 2012.  Here are the highlights of the bill:

  • Tax brackets to remain the same, with a 10% bottom rate and a 35% top rate.  Without this legislation, the bottom rate would have increased to 15% and the top rate to 39.6%.
  • A “payroll tax holiday” that reduces the amount of FICA withholding by 2% (self-employed taxpayers will see their self-employment tax decrease by 2%).  For a person making $40,000/year, this would equal an $800 savings.  (But the Making Work Pay Credit is expiring, which negates some of the savings.)
  • Another “patch” to the Alternative Minimum Tax that will help millions of taxpayers avoid this tax.
  • The capital gains and qualified dividends rates remain at 0% for taxpayers in the 10% and 15% tax brackets, and at 15% for taxpayers in the higher tax brackets. 
  • The Child Tax Credit will remain at $1,000 (it had been set to decrease to $500 in 2011).
  • You can claim dependent care expenses of $3,000 for one child or $6,000 for two or more children.  These amounts had been set to decrease to $2,400 and $4,800.
  • The expanded Earned Income Credit remains in place through 2012.
  • The credit available for energy efficient upgrades to your home remains in place through 2012 (it had been set to expire at the end of this year).
  • Extension of the American Opportunity Credit for college expenses, and an extension of the “above-the-line” deduction for college expenses.
  • Special 100% “bonus depreciation” for purchases of brand-new assets from September 9, 2010, through the end of 2011.
  • The estate tax returns with a $5 million exemption per person, and a 35% top rate, retroactive to January 1, 2010.  Estates arising in 2010 will have the option of of using these rules, or using the “old rules” of no estate tax and a reduction in the amount of increase in carryover basis.