The Tax Relief, Unem­ploy­ment Insur­ance Reau­tho­riza­tion, and Job Cre­ation Act of 2010, signed into law on Decem­ber 17, 2010, is the end result of Pres­i­dent Oba­ma’s com­pro­mise with the GOP to extend the “Bush tax cuts” set to expire at year-end. In addi­tion to pro­vid­ing a 13-month exten­sion of ben­e­fits for the long-term unem­ployed and extend­ing expir­ing pro­vi­sions, the Act includes sev­er­al new tax pro­vi­sions. Here’s what you need to know:

Tax rates

The Act extends exist­ing fed­er­al income tax rates for two addi­tion­al years. As in 2010, the fed­er­al tax brack­et rates for 2011 and 2012 will be 10%, 15%, 25%, 28%, 33%, and 35%. (With­out this leg­is­la­tion, fed­er­al income tax rates would have increased begin­ning in 2011–the cur­rent 10% fed­er­al income tax brack­et would have dis­ap­peared, and the five remain­ing tax brack­ets would have been 15%, 28%, 31%, 36%, and 39.6%.)

Exist­ing tax rates for long-term cap­i­tal gains and qual­i­fy­ing div­i­dends are also extend­ed through 2012. As a result, long-term cap­i­tal gains and qual­i­fy­ing div­i­dends will con­tin­ue to be taxed at a max­i­mum rate of 15%. If you’re in the 10% or 15% mar­gin­al income tax brack­ets, a spe­cial 0% rate will gen­er­al­ly con­tin­ue to apply.

Alter­na­tive min­i­mum tax (AMT)

The alter­na­tive min­i­mum tax (AMT) is essen­tial­ly a par­al­lel fed­er­al income tax sys­tem, with its own rates and rules. To pre­vent a dra­mat­ic increase in the num­ber of indi­vid­u­als sub­ject to AMT, the Act retroac­tive­ly increas­es AMT exemp­tion amounts for 2010, and extends the increased exemp­tion amounts to 2011. Non­re­fund­able per­son­al income tax cred­its will also con­tin­ue to be allowed to off­set AMT lia­bil­i­ty in 2010 and 2011.

AMT exemp­tion amounts

2010

2011

Mar­ried fil­ing joint­ly

$72,450

$74,450

Sin­gle or head of house­hold

$47,450

$48,450

Mar­ried fil­ing sep­a­rate­ly

$36,225

$37,225

Estate tax

The Act makes major, though tem­po­rary, changes to the fed­er­al estate tax. For 2011 and 2012, the estate tax exemp­tion amount (the applic­a­ble exclu­sion amount, renamed the basic exclu­sion amount) will be $5 mil­lion per per­son (the $5 mil­lion will be indexed for infla­tion in 2012); the top trans­fer tax rate for these years will be 35%. The $5 mil­lion exemp­tion amount and 35% top estate tax rate will apply retroac­tive­ly to 2010 as well, but for indi­vid­u­als who died in 2010, an elec­tion can be made to choose the estate tax pro­vi­sions effec­tive pri­or to this leg­is­la­tion (i.e., no estate tax applies, but spe­cial mod­i­fied car­ry­over basis rules apply); an extend­ed due date is pro­vid­ed for indi­vid­u­als who died on or after Jan­u­ary 1, 2010, and before Decem­ber 17, 2010. For 2011 and 2012, when one spouse dies, any unused por­tion of that spouse’s estate tax exemp­tion amount may be trans­ferred to the sur­viv­ing spouse.

One-year reduc­tion in Social Secu­ri­ty pay­roll tax

If you’re an employ­ee, 6.2% of your cov­ered wages up to the tax­able wage base ($106,800 in 2011) is gen­er­al­ly with­held for your por­tion of the Social Secu­ri­ty retire­ment com­po­nent of FICA employ­ment tax. If you’re a self-employed indi­vid­ual, you pay 12.4% for the Social Secu­ri­ty por­tion of your self-employ­ment tax. The Act imple­ments a one-year 2% reduc­tion in this tax. That means for 2011, you’ll pay the tax at a rate of 4.2% if you’re an employ­ee, and 10.4% if you’re self-employed.

Depre­ci­a­tion and IRC Sec­tion 179 expens­ing

If you’re a busi­ness own­er or self-employed indi­vid­ual, you may know that an addi­tion­al 50% depre­ci­a­tion deduc­tion has been avail­able for qual­i­fy­ing prop­er­ty placed in ser­vice dur­ing 2010. The Act increas­es the bonus depre­ci­a­tion per­cent­age allowed to 100% for prop­er­ty acquired and placed in ser­vice after Sep­tem­ber 8, 2010, and before Jan­u­ary 1, 2012. The Act also extends bonus depre­ci­a­tion at the 50% lev­el through 2012 (the 50% bonus depre­ci­a­tion will apply for prop­er­ty placed in ser­vice after Decem­ber 31, 2011, and before Jan­u­ary 1, 2013).

For tax years 2010 and 2011, the Small Busi­ness Jobs Act increased the max­i­mum amount that could be expensed under IRC Sec­tion 179 to $500,000 and increased the phase­out thresh­old amount to $2 mil­lion. For 2012, the dol­lar lim­it amount and phase­out thresh­old lev­el were sched­uled to drop to $25,000 and $200,000, respec­tive­ly. This Act sets the IRC Sec­tion 179 expense lim­it for 2012 at its 2007 level–$125,000, with a phase­out thresh­old of $500,000–indexed for infla­tion.

Edu­ca­tion pro­vi­sions

  • The Act extends the Amer­i­can Oppor­tu­ni­ty tax cred­it (known as the Hope tax cred­it before being significantly–though temporarily–modified by the Amer­i­can Recov­ery and Rein­vest­ment Act of 2009). The Amer­i­can Oppor­tu­ni­ty tax cred­it’s high­er max­i­mum cred­it amount, increased income lim­its, expand­ed applic­a­bil­i­ty to the first four years of col­lege, and poten­tial refund­abil­i­ty, avail­able in 2009 and 2010, are extend­ed through 2012.
  • The cur­rent rules that apply to Coverdell edu­ca­tion sav­ings accounts (e.g., $2,000 annu­al con­tri­bu­tion lim­it, edu­ca­tion expens­es expand­ed to include ele­men­tary and sec­ondary school expens­es) are also extend­ed through 2012. With­out this change, the annu­al con­tri­bu­tion lim­it would have dropped to $500 begin­ning Jan­u­ary 1, 2011.
  • For the stu­dent loan inter­est deduc­tion, increased income lim­its and the sus­pen­sion of the 60-month rule, which would have expired at the end of 2010, are extend­ed for two years (the deduc­tion was, pri­or to 2001, lim­it­ed to inter­est paid in the first 60 months of repay­ment).
  • The deduc­tion for qual­i­fied high­er edu­ca­tion expens­es, which expired at the end of 2009, is retroac­tive­ly rein­stat­ed for 2010, and extend­ed through 2011.

Oth­er changes

The Act pre­vents item­ized deduc­tions and per­son­al and depen­den­cy exemp­tions from being reduced for high­er income indi­vid­u­als for two addi­tion­al years (2011 and 2012). The Act also extends “mar­riage penal­ty” relief, in the form of an expand­ed 15% tax brack­et and an increased stan­dard deduc­tion amount for mar­ried indi­vid­u­als fil­ing joint­ly, through 2012.

Pro­vi­sions extend­ed through 2011 include: the $250 above-the-line deduc­tion for ele­men­tary school and sec­ondary school teacher class­room expens­es; tax-free IRA dis­tri­b­u­tions to char­i­ta­ble orga­ni­za­tions by indi­vid­u­als age 70½ or old­er; and the deductibil­i­ty of mort­gage insur­ance pre­mi­ums. Pro­vi­sions extend­ed through 2012 include: rules relat­ing to the earned income cred­it; the child tax cred­it; the cred­it for child and depen­dent care expens­es; and the adop­tion tax cred­it and exclu­sion amount for employ­er-paid adop­tion assis­tance.