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The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses.
Here's a look at the key elements of the package:
- The current, favorable income tax rates will be retained for two years (2011 and 2012), with a top tax of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
- Employees and self-employed workers get a reduction of two percentage points in Social Security tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
- A two-year AMT “patch” for 2010 and 2011 provides a modest increase in AMT exemption amounts and allows personal nonrefundable credits to offset AMT as well as regular tax.
- Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 are retained. For example, the new law extends for two years (a) the $1,000 child tax credit (and maintains its expanded refund ability), and (b) the American Opportunity tax credit for higher education, and its partial refundable.
- Two crackdowns on deductions for higher-income people have been deferred. For 2011 and 2012, higher-income individuals will not face a reduction in their itemized deductions or a phase-out of personal exemptions.
- Businesses can write off 100% of their new equipment and machinery purchases in the placed-in-service year, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
- Many of the popular tax breaks that went off the books at the end of 2009 have been retroactively reinstated for 2010 and extended through the end of 2011. Among many others, the retroactively reinstated and extended individual and business provisions include the election to take an itemized deduction for state and local general sales taxes instead of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit. The credit for making energy-saving improvements for a home has been extended for one year, through 2011, but much tougher rules apply after 2010.
- After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35% and a step-up in basis. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.
Real estate gets overlooked/ignored:
Sadly, but not surprisingly, the final bill was packed with outrageous amounts of pork to buy the votes of representatives on both sides of the aisle. And while there was some talk and chatter about the home mortgage interest deduction being addressed in some fashion, no action was taken.
Congress and the President will continue to focus on job-creation initiatives, but sooner or later they will need to deal with the elephants (Fannie, Freddie, and housing) still sitting in the corner of the room. The thinking now is that the creation of jobs will help housing, but the housing finance challenges are not going away.
The Federal Reserve has taken another unusual step, and ostensibly pre-announced no rate hikes in 2011. The market has not found this comforting, and has taken rates to levels about .75% off their lows in terms of rates on home mortgages.
We believe that most of the damage of higher rates is now factored into the market, and interest rates on home mortgages will hold steady at their current levels through the first quarter of 2011. We are happy to help you, your clients, and friends and family evaluate all the options to refinance or buy something in the coming year. Please ask us about Fannie and Freddie's options to refinance at up to 100% loan-to-value with no mortgage insurance!
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