Congress Passed 2010 Middle Class Tax Relief Act

The 2010 Middle Class Tax Relief Act was passed a few weeks ago after the President indicated he’d be willing to sign on to extending the tax rates in effect for 2009, into 2010 and 2011.  In exchange for his support, Congress agreed to extend unemployment benefits for the next 13 months.

I am studying the impact of the new law, but I’ve picked out a few items that may impact you in 2010 and 2011:

Tax Rates:

• No Change.  Tax Rates for 2010 and 2011 will be 10%, 15%, 25%, 28%, 33%, and 35%
• Capital Gains Tax Rates: Remain unchanged through 2012.  Also, Dividends will be taxed at Capital Gains rates through 2012.

American Opportunity Credit:

This education credit has been extended through 2012.  This is a significant credit (worth up to $2,500) available to parents paying for their kids first 4 years of College.  It’s also significant since up to $1,000 is refundable to the Taxpayer.

What this means to you: If you are paying for kids in College (first four years) tell your Tax Professional to take advantage of this Credit.

Residential Energy Credit:

This credit was set to expire in 2010, however, it has been extended indefinitely.  However, after 2010, the maximum credit allowed per home will be limited to $500, of which only $200 can be for windows.

What this means to you: If you have any left over Christmas money, invest in the energy efficiency of your home this year when you can get a bigger tax credit, rather than next year when it will be significantly lower.

Payroll Tax Reduction:

Beginning in 2011 (and for only 2011), the old age portion of the employee’s Social Security withholding will be reduced from 6.2% to 4.2%.  The employer match will remain at 6.2%.  For self employed individuals, the rate will be reduced from 12.4% to 10.4%.

What this means to you: A person or family making $50,000 will save $1,000 in Social Security Tax next year. This averages almost $20 per week in additional spending money. You should consider investing this money in some sort of Tax deferred account, or increasing or contribution to your 401K.

There are other changes the new law brought about, but most of it was extending the tax rates for a year or two.  We will continue to study the law and continue to comment on how you might use it to reduce your family’s tax burden.