Legal Briefs

2010 Tax Relief Act

Published Monday, January 4, 2010

In December 2010, Congress passed the Tax Relief Act of 2010 and the President recently signed the bill into law. This action impacts taxpayers in many different ways, ranging from the Social Security taxes taken out of your paycheck to taxes that your heirs might pay on your estate after you die.

Jim Coyle, a tax attorney and estate planning specialist at the Stewart Melvin & Frost law firm in Gainesville, Ga., can assist you in understanding how this tax relief will affect you.


Question: What is your assessment of this tax relief bill? And how will it impact the average American?

Jim: Passage of this Tax Relief measure came as pleasant surprise. It is very favorable to taxpayers. In essence, the Bush-era tax cuts were in jeopardy of expiring in 2011. But with the continuing slow economic recovery and the political climate in Washington, Congress and the President chose to extend the tax cuts for another two years.


In addition, average taxpayer will receive a little bit more money in their pockets next year from some other provisions such as a reduction in the payroll tax. Te other big surprise in this Tax Relief measure was the increased exemption on estate taxes for the wealthy.

Question: What are some other key provisions of the tax-relief bill?

Jim: Income tax rates had been slated to move up in each of the various tax brackets. Under this new legislation, however, the rates will remain the same for the next two years (10%, 15%, 25%, 28%, 33%, and 35% -- which equates to a savings of between 10 to 13 percentage points for people in the lower to middle income-tax brackets.


So, in addition to the FICA savings, folks will pocket even more money from lower income tax rates.


Capital gains and qualified dividends: Maximum tax rates had been set to jump up to 20% but will stay at 15% for capital gains on stock sales and on stock dividends.


Question: You mentioned a reduction in payroll taxes. What impact will the tax-relief law have on payroll taxes?

Jim: The FICA (or Social Security) tax will be reduced from 6.2 percent to 4.2 percent for employees. For some wage earners, that will result in a maximum tax savings of $2,136 in 2011. For the self-employed, the self-employment tax rate is reduced by two percentage points to 10.4 percent for 2011. This equates to a tax savings for everyone who receives earned income.


Question: You also mentioned estate taxes. What impact will the tax-relief law have on the so-called “death tax”?


Jim: This was a big surprise. Estate planners like myself have been in a state of flux over the past year – waiting for the return of the estate tax in 2011 and wondering at what level it would be.


You might recall that the estate tax was eliminated in 2010 under the Bush-era tax cuts. Many estate planners like myself expected that the estate tax would be reinstated in 2011 at an exemption level of $1 million. This would have impacted a lot of families, because even modest households typically have assets worth more than $1 million when you add up all the little things . . . the value in their home, their life insurance, 401-Ks, etc.


But what happened instead under the Tax Relief law was that – even though the estate tax returned – the exemption level was raised to $5 million for 2011 and 2012 for individual estates and $10 million for couples.


For the next two years, your assets upon your death would have to be valued at more than $5 million before your heirs would be required to pay an estate tax. Basically, that gets a whole lot of families and heirs off the hook from a tax-liability standpoint.


In addition, the estate tax rate was capped at 35 percent – as opposed to 55 percent if the tax relief law had not gone into effect.


Question: So, give us a little perspective – what’s the impact of this lower estate tax rate on the super wealthy?


Jim: It’s huge. I read one report that a $100 million estate would pay $20 million less in taxes in 2011 than it would have if Congress had not acted and the estate tax had reverted back to its 2001 level – 55 percent tax rate for individual estates larger than $1 million.


Another favorable aspect of this new legislation deals with “portability” of your estate tax exemption from one spouse to the other.


In other words, let’s use the example of a husband and wife with $10 million in assets, which is the estate-tax threshold for couples. Let’s say the wife dies first and her part of the estate is calculated at $3 million or roughly a third of the overall estate. When the husband eventually dies, his heirs would receive credits from the deceased wife’s unclaimed portion of the overall estate by shifting those credits over to the husband. This represents another benefit to wealthier households that would not have been allowed without this new legislation.


Question: Is this the end of estate taxes?

Jim: Not necessarily. This estate tax has been a moving target, and we just don’t know what will happen in two years when the tax relief law is due to expire – and the estate tax exemption would drop back down to $1 million again.


Therefore, if you are concerned about protecting the assets that you will one day pass on to your heirs, it would be wise to continue to watch this issue, be flexible, and plan for a number of different possible outcomes.