The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 creates a two (2) year patch and extends and expands a wide variety of valuable tax breaks. Many of the extended breaks were set to expire after 2010 and have now been extended through 2012.

Ordinary Income Tax Rates

Ordinary income tax rates for 2011 and 2012 as well as 2013 and beyond are as follows:

Long -Term Capital Gains Rates

Under the 2001 tax act, the 15% long-term capital gains rate was scheduled to increase to 20% in 2011. The 2010 Tax Relief act extends the 15% rate through 2012.

Qualified Dividend Tax Rates

The 2010 Tax Relief act extends taxation of qualified dividends at the 15% long-term capital gains tax rate through 2012 (0% for those in the bottom two brackets). Without Congressional action, dividends would have gone back to being taxed at ordinary income rates in 2011, with a top rate as high as 39.6%.

Payroll Tax

For 2011 only, the 2010 Tax Relief act reduces the employee portion of the Social Security tax on earned income from 6.2% to 4.2%. The self-employed pay both the employee and employer portions of Social Security tax, and the act also reduces their rate by two percentage points for 2011, from 12.4% to 10.4%.

Estate Tax

The 2010 Tax Relief act retroactively brings back the estate tax for 2010, but with a $5 million exemption and a 35% rate. It extends these levels to 2011 and 2012, with an inflation adjustment on the exemption for the latter year. Then in 2013, the exemption and top rate will return to levels prescribed by pre-2001 tax law - $1,000,000 credit with a 55% tax rate.

Election for 2010

For anyone who died in 2010, the estate may either follow the new rules under the 2010 Tax Relief act or elect to follow the pre-act regime with no estate tax and basis carryover.

Generation-Skipping Transfer Tax

The GST tax rate goes back up to 35% with a $5,000,000 exception to match the top estate tax rate in 2011 and 2012.

Gift Tax

The gift tax was never repealed for 2010, so the 2010 Tax Relief act provides no change to the gift tax regime for 2010, i.e., the exemption remains at $1 million and the top rate at 35%. However for 2011 and 2012, the gift tax credit increases to $5,000,000 with a 35% gift tax rate.

Estate Tax Credit Portability

The 2010 Tax Relief act includes a provision that will (temporarily) provide estate planning flexibility to married couples. If one spouse dies in 2011 or 2012 and part (or all) of his or her estate tax exemption is unused at his or her death, the estate can elect to permit the surviving spouse to use the deceased spouse's remaining estate tax exemption. This is referred to as estate tax credit portability.

Still, this election is currently available for only two years unless Congress extends it. So married couples can't depend on the election being available to ensure that they take full advantage of both spouses' exemptions.

Please also note that portability will lose the benefit of funding the credit trust on the death of the first spouse so as to capture all of the appreciation that takes place between the death of the first spouse and the death of the surviving spouse. In addition, this simplification will come at a potentially tremendous cost. If the surviving spouse remarries the assets will be at risk from the new spouse, and the new spouse elective share.

Since the 2010 Act is only a two (2) year patch, the portability provision applies only if the first spouse dies after 2010 and the surviving spouse dies before 2013.

Estate, Gift and GST Exemption and Rates

(Updated June 2011)