What the 2010 Tax Relief Act Means for You

With just a little over a week left in 2010, the White House finally delivered an answer to the tax cut quandary when President Obama signed the 2010 Tax Relief Act on December 17, 2010. The law has been championed as a symbol of bipartisan compromise with provisions favored by both parties. Despite the criticism about the deficit, the new law is expected to stimulate the economy; Obama stated, “…real money that’s going to make a real difference in people’s lives.” The new law extends the Bush-era tax cuts for two years, provides relief for the estate tax, and reduces social security taxes in addition to extending other credits. While pundits speculate how the $801 billion tax cut bill will impact Obama’s relationship within his own party, this law can certainly put your mind at ease and here is how.

· Extension of Bush-era Tax Rates. Had the law not passed, rates were scheduled to rise to 15%, 28%, 31%, 36%, and 39.6%. With the passing of the 2010 Tax Relief Act, tax rates for individuals are 10%, 15%, 28%, 33%, and 35%. Since the rates are unchanged, you no longer have to worry about a tax hike in 2011.

o However, there is still plenty of time to finalize any tax savings plans. Contact us for ideas or assistance.

o Now, it might make some more sense to those with lower tax bills to convert your traditional IRA to a Roth IRA. This conversion will allow you to defer the taxes on the income until 2011 and 2012, taking advantage of the lower tax rates that have been extended through 12/31/2012. Furthermore, if you feel the Roth IRA does not suit you, you do have a second chance and can undo the Roth conversion until October 15, 2011, which is unprecedented. However, the ROTH Conversion must be effectuated by 12/31/2010. Please contact us if you are considering this option; we can help guide you!

· Estate Tax Relief. Heirs can opt to treat the estate by 2010 tax laws and calculate the capital gains on all assets in the estate to be taxed at 15%. Otherwise, the 2011 law would exempt the first $5 million and tax the rest at a rate of 35%. The news of this relief will certainly bring holiday cheer to affluent Americans.

· Reduction on Social Security Taxes. This historic bill cuts by two percentage points an employee’s portion of the 6.2% tax. Viewed as the replacement to the Making-Work-Pay income tax credit, the reduction on social security tax can actually apply to a broader range of workers.