Congress Passes the Tax Bill

Two Years of Tax Certainty in an Era of Uncertainty

– President to Approve Significant Tax Benefits

Early this morning the U.S. House passed a bipartisan tax bill that will resolve many questions weighing on individuals and businesses.  The President is expected to quickly sign this bill.

Some notable plusses include:

Individual income and payroll taxes.

The bill extends through 2012 the Bush-era tax rates enacted in 2001-2003, instead of allowing them to return to pre-2001 levels, effectively preventing a rise for nearly all U.S. taxpayers.

Affluent taxpayers also benefit from the two-year repeal of the “Pease” limitation (named for the congressman who sponsored it) and personal exemption phase-out (PEP). These are deduction limits that functioned as back-door tax increases for many affluent taxpayers. The Pease provision cut itemized deductions by 3% for incomes above a threshold; PEP eroded the value of the personal exemption.

For 2011 only, the bill imposes a historic reduction in Social Security (FICA) taxes, cutting by two percentage points the employee’s portion of the 6.2% tax. Savings per worker will vary with income, but could be as much as $2,136 for those earning more than $106,800. Both members of a married couple can receive the benefit.

The bill also contains a two-year patch for the “alternative minimum tax” retroactive to January 2010. The AMT, an alternate tax regime originally meant to ensure that people with high incomes pay taxes, isn’t indexed for inflation, and has come to include middle-class taxpayers. The patch spares an additional 21 million taxpayers this year.

Investment taxes.

The bill extends for two years the current tax rates on long-term capital gains and dividends. The top rate for both will remain at its historic low of 15%. The rate will remain zero for couples with taxable income below $69,000.   Absent the extension, the top rate on long-term gains would have risen to 20%, while the top dividend rate could have risen to as high as 39.6%.

Deductions and credits.

Among the benefits extended through 2011: deductions for teacher expenses and for state sales taxes in lieu of state income taxes. Lawmakers also extended through 2011 the provision allowing taxpayers over age 70½ to make tax-free donations of IRA assets to qualified charities.

Estate and gift taxes.

For 2011 and 2012, the top estate-tax rate falls to 35% and the exemption rises to $5 million an individual.

The bill also allows executors of 2010 estates to elect whether to use 2010 rules or 2011 rules. The choice will help heirs who would pay more as a result of the lapse of the estate tax in 2010 and a corresponding rise in capital-gains taxes.

Also for the first time, estate, gift and generation-skipping taxes will be “unified” so that one $5 million exemption per individual applies to all three.