Devolping Diversity in the Workplace

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December 28, 2010

Tax Relief Act of 2010 Offers Many Planning Opportunities

On December 17, the President signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRA 2010). The contentious path of this legislation as well as the highlights listed below have been well publicized:  Extension of the 2010 individual income tax rate structure with the highest marginal rate at 35 percent through 2012

 Two percent reduction in Social Security tax for 2011 for employees and self-employed individuals
 An Alternative Minimum Tax (AMT) “patch” for 2010 and 2011  Unlimited write off for equipment placed in service after September 8, 2010 and through December 31, 2011
 Reinstatement of the estate tax through 2012 with a top rate of 35 percent and a $5 million exemption
This Alert discusses the major provisions of TRA 2010 and some associated planning opportunities. We are pleased to respond to any questions you may have. IMPACT ON INDIVIDUALS
Individual Tax Rates
TRA 2010 extends the 2010 tax rate schedule through 2012, with a top marginal rate of 35 percent. Unless further legislation is enacted the top marginal rate will be 39.6 percent in 2013. In addition the 15 percent bracket is expanded for married joint filers thus easing the so-called marriage penalty for 2011 and 2012. Planning Point: With the current rates extended taxable income deferral remains the principle planning focus. However, individuals subject to AMT may want to accelerate taxable income.

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Qualified Dividend and Capital Gains Rates
Under current law smaller amounts of capital gains and qualified dividend income may have a zero tax rate (essentially for taxpayers who wouldn’t otherwise have total taxable income over the 15 percent bracket) and above that they are taxed at 15 percent. TRA 2010 extends the zero and 15 percent tax rates through 2012. Planning Point: Due to the extension of the maximum 15 percent capital gain rate there is no need to accelerate asset sales. Also, there is no general urgency to distribute domestic or foreign corporate earnings in anticipation of the feared 2010 sunset of the 15 percent rate on qualified dividends. Gain (up to a ceiling amount) from the sale of eligible qualified small business stock (QSBS) acquired between September 27, 2010 and January 1, 2012, if held for 5 years, is completely exempt from regular tax and the AMT. Planning Point: Consider the QSBS entity choice for business start ups formed during this period. Also, discuss this option with your investment advisor as he or she may know of a vehicle to invest in QSBS. Payroll Tax Reduction

TRA 2010 reduces the employee OASDI tax rate from 6.2 to 4.2 percent for all of 2011. With the OASDI wage base at $106,800 for 2011 this represents a savings of up to $2,136 for the employee. For self-employed individuals the OASDI tax rate is reduced from 12.4 to 10.4 percent for 2011 to achieve a mirror reduction in self-employment taxes of up to $2,136. Alternative Minimum Tax

TRA 2010 increases the AMT exemption amounts for 2010 and 2011 to be as follows: Married filing joint and surviving spouses

2010
$72,450

2011
$74,450

Single individual

$47,450

$48,450

Married filing separate

$36,225

$37,225

Planning Point: TRA 2010 extends through 2011 the ability to offset certain nonrefundable personal credits against the AMT as well as the regular tax. Accordingly, capturing these credits during this period will result in dollar for dollar savings. However, note that the

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benefit of many of these credits phases out for higher income individuals. A partial list of these credits follows:
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Child and Dependent Care Credit
Credit for the Elderly and Disabled
Child Tax Credit (AMT offset through 2012 as well)
Lifetime Learning Credit
Modified Hope Credit/American Opportunity Tax Credit
Credit for Elective Deferrals and...
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