Tax Legislative Update
The year 2010 has been significant for new tax legislation although much of it occurred in the final weeks
of the year.
Both Congress and the White House had been under considerable pressure to enact changes
designed to keep the income tax law functioning properly as well as changes deemed important for
economic and political reasons.
First, Congress enacted the
Small Business Jobs Act of 2010
2010) on September 27, 2010.
This Act made some important changes that primarily affected businesses.
More substantive changes, however, came later in a couple of tax bills that we refer to as the
Act of 2010
Interestingly, many TRA 2010 changes do not actually change current law but
merely extend current law for two years.
Thus, many of the provisions discussed below may not look
different from the textbook because they are essentially the same.
Nevertheless, these extensions into
2011 and 2012 are important because, had the extensions not been made, individual tax rates would have
risen and a number of deductions and credits would have expired.
This update covers three basic areas; individual taxpayers, business taxpayers, and estates and gifts.
chapter in the text that covers a specific item is referenced in bold print at the end of the relevant
Summary of Important New Legislation
Individual Tax Rates
Through a phenomenon called “sunset provisions,” whereby a tax law expires upon reaching a specific
date, individual income tax rates were set to automatically increase on January 1, 2011.
While the entire
rate structure was scheduled to increase, the most notable increases were the 10% rate increasing to 15%
and the 35% rate increasing to 39.6%.
Due to the slow U.S. economy and for political reasons,
policymakers deemed an increase in tax rates at this time as unacceptable, and Congress finally agreed to
extend the 2010 rates of 10%, 15%, 25%, 28%, 33%, and 35% to 2011 and 2012.
The thresholds (or
bracket cutoffs), however, will not be exactly the same in 2011 as in 2010 because the brackets are
adjusted for inflation.
The appendix to this update reproduces the projected 2011 rate schedules for
individuals (and estates and trusts).
Long-Term Capital Gains and Qualified Dividends
Since 2003, qualified dividends and most long-term capital gains (LTCG) have been taxed at a maximum
The exceptions are LTCGs subject to either 28% (collectibles or Sec. 1202 stock) or 25%
(unrecaptured Sec. 1250 gain).
Also, for the last couple of years, if a taxpayer was in the 15% or lower
individual tax bracket, any LTCG or qualified dividend was subject to a zero tax rate.
Both the maximum
15% rate and the zero rate would have increased significantly as of January 1, 2011.
TRA 2010 extends
both of these provisions for 2011 and 2012.
Without further Congressional action, higher rates will go
into effect on January 1, 2013.
Chapters I:2 and I:5.