On December 17, 2010 the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act) was signed into law by President Obama. The following is a summary of the Act’s many taxpayer-friendly provisions we think will affect most individuals:

Lower Tax Rates Extended through 2012. The Act extends the 10%, 15%, 25%, 28%, 33%, and 35% federal income tax rates on ordinary income through 2012. Without the new law, these rates would have been replaced in 2011 and beyond by the pre-Bush rates of 15%, 28%, 31%, 36%, and 39.6%.

The Act also extends the 0% and 15% federal income tax rates on most long-term capital gains and dividends through 2012. Without the new law, most long-term capital gains would have been taxed at 10% or 20% and dividends would have been taxed at ordinary rates of up to 39.6%.

Marriage Penalty Relief Extended through 2012. The 2001 Bush tax cut legislation eased the marriage penalty by adjusting the lowest two tax brackets for married couples and giving them bigger standard deductions. The Act extends them through 2012.

Social Security Tax Reduction for 2011 Only. The Act reduces the 6.2% Social Security tax withholding rate on employee wages from 6.2% to 4.2%. This temporary change only affects wages up to the Social Security tax ceiling (the first $106,800 of 2011 wages). The maximum savings are $2,136 for unmarried individuals and $4,272 for couples. The Social Security tax component of the self-employment tax is cut from 12.4% to 10.4% for 2011, so self-employed individuals will benefit as well.

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Personal Exemption and Itemized Deduction Phase-outs Repealed through 2012. For 2010, unfavorable phase-out rules that could reduce some of your most-cherished write-offs were temporarily repealed. The phase-out rules were scheduled to come roaring back in 2011. Thankfully, the Act keeps the repeal in place through 2012.

Alternative Minimum Tax (AMT) Patch for 2010 and 2011. The patch primarily consists of allowing bigger AMT exemptions and allowing personal tax credits to offset the AMT. The Act makes the patch for 2010 and for 2011 as well.

American Opportunity Education Credit Extended through 2012. The American Opportunity credit can be worth up to $2,500, can be claimed for up to four years of undergraduate education, and is 40% refundable. It was scheduled to expire at the end of 2010. The Act extends the more generous American Opportunity credit through 2012.

College Tuition Deduction Extended through 2011. This deduction, which can be as much as $4,000, or $2,000 at higher income levels, expired at the end of 2009. The Act retroactively restores the deduction for 2010 and extends it through 2011.

More Generous Student Loan Interest Deduction Rules Extended through 2012. This write-off, which can be as much as $2,500 (whether you itemize or not), was scheduled to fall under less favorable rules in 2011 and beyond. The Act extends through 2012 the more favorable rules established by the 2001 Bush tax cut legislation.

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Bigger Child Credit Extended through 2012. For 2011 and beyond, the maximum credit was scheduled to drop from $1,000 to only $500. The Act extends the $1,000 credit through 2012.

More Generous Coverdell Education Savings Account Rules Extended through 2012. For 2011, the maximum contribution to federal-income-tax-free Coverdell college savings accounts was scheduled to drop from $2,000 to only $500, and a stricter phase-out rule would have limited contributions by many married joint-filing couples. The Act extends through 2012 the more generous contribution rules established by the 2001 Bush tax cut legislation.

Option to Deduct State and Local Sales Taxes Extended through 2011. For the last few years, individuals who paid little or no state income taxes had the option of claiming an alternative itemized deduction for state and local general sales taxes. The Act retroactively restores it for 2010 and extends it through 2011.

More Generous Dependent Care Tax Credit Rules Extended through 2012. For the last few years, parents could claim a credit of up to $600 for costs to care for one under-age-13 child or up to $1,200 for costs to care for two or more under-age-13 kids, as long as the parents work. Lower-income parents can claim larger credits of up to $1,050 and $2,100, respectively. The Act extends the more generous maximum credit amounts through 2012. Note that in some cases, the credit can also be claimed for dependents other than under-age-13 children.

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Smaller Tax Credit for 2011 Energy-efficient Home Improvements. The 2009 Stimulus Act provided that 30% of 2009 and 2010 expenditures for energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in U.S. residences could qualify for a credit, up to a maximum credit amount of $1,500 over the two years combined. The new law extends the credit through 2011, but the credit percentage is scaled back to only 10% and the lifetime credit limit is only $500. The $500 credit cap is reduced by any credits claimed in 2006­2010.

$250 Deduction for K­¬12 Educators Extended through 2011. For the last few years, teachers and other eligible personnel at K¬­12 schools could deduct up to $250 of school-related expenses paid out of their own pockets—whether they itemized or not. This break expired at the end of 2009. The Act retroactively restores it for 2010 and extends it through 2011.

As you can see, the new law includes lots of changes, and we did not cover them all here due to space constraints. If you have questions or want more complete information about the new law, please contact us.

Bigger Child Credit Extended through 2012. For 2011 and beyond, the maximum credit was scheduled to drop from $1,000 to only $500. The Act extends the $1,000 credit through 2012.

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