Tax Breaks Extended, Expanded for 2010, 2011 and 2012

The uncertainty over the state of the future income tax dilemma has ended. On December 17th, President Obama signed into effect the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010." This piece of legislation has several implications for income tax payers for 2010, 2011 and 2012, including:

• Extension of the Bush tax cuts and income tax rates along with several tax credits and incentives through 2012
• Changes in estate taxes and estate tax exemptions for 2011 and 2012

It is very important to note that most of these extensions of various tax provisions will be short-lived, and future action will still be required to set the income tax rates and deal with many other issues that will sunset in 2012.

Below is a quick overview of the key provisions that are inside this legislation and the potential steps you can take to maximize your tax efficiency:

Individual income extension of 2010 tax rates
Federal income tax rates that were established under former President Bush and that were set to sunset as of 2010 have been extended through 2012. The current income tax brackets are to be maintained at 10%, 15%, 25%, 33%, and 35%.

Extension of more favorable capital gain and dividend tax rates
The current tax rates as applied to dividends and capital gains are also extended through 2012. This includes a long-term capital gains tax rate and qualifying dividends tax rate of 0% for those that fall into the 10% and 15% tax brackets. For others in higher tax brackets the long-term capital gains tax rate and tax rate on qualifying dividends will remain at 15%.

Social Security and payroll taxes
The 6.2% Social Security tax paid by employees will be reduced to 4.2% for 2011. This allows for potential savings for individuals by reducing the amount of payroll tax deducted. The payroll tax as it applied to Medicare for employers and employees will be unchanged. Self-employed individuals will pay Social Security taxes at a reduced rate of 10.4% in 2011, which is down from the standard 12.4% rate.

Temporary alternative minimum tax (AMT) relief
Exemption amounts that are applied to calculating the AMT will increase for 2011, which will keep many tax payers from falling into the AMT rules.

Estate taxes and estate tax exemptions
Estate tax rates have changed significantly and several times in the past couple of years since 2001. In 2009, the estate tax exemption per-person was $3.5 million, which meant that any estates that were larger than this value were subject to a 45% tax rate. In 2010, the estate tax was repealed completely. After 2010 in 2011, according to the old legislation, the estate tax exemption should have been set at $1 million per person with the highest estate tax rate set at 55%. As part of President Obama's new legislation, the highest estate tax rate for 2011 and 2012 will be 35% along with a $5 million exemption per person. Therefore, any estates larger than those estates will not be subject to the tax.

Charitable IRA rollovers
As part of the legislation for tax year 2010 and 2011, individuals are allowed to direct distributions of up $100,000 per person to qualified charities from an IRA without incurring any tax liabilities.

Things You Can Do to Take Advantage

• Consider taking advantage of tax deductions by maximizing your contributions to an employer-retirement plan and/or IRA.
• Take a look at your investment portfolio and see if it makes sense for you to position your investments to take advantage of the lower capital gains tax rate and the lower qualifying dividends tax rate.
• Consider how your estate plan going forwarded will be affected by these new exemption amounts and tax rates for 2011 and 2012.
• Talk to your estate attorney and financial advisor about gifting strategies that you can take advantage of as a result of these new estate tax laws.
• Contact your favorite charities to discuss making a gift using an IRA rollover.
• Be sure to take advantage of this strategy by January 31st, 2011 if it is to apply for the 2010 tax year.

Since the tax laws have been more clearly defined for the next couple of years, speak to your Isakov Planning Group Financial Advisor about how you can take advantage of these new changes in your investment portfolio and estate plan.