End of the Year Tax Deal – The Final Figures

Republicans and Democrats were able to negotiate an end of the year tax deal as you well know by now. Having inspected it closely, we can give you a summary of the key figures now.

The new tax deal is known as the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010". The name alone should give you pause. Anything that lengthy and messy must be a muddled affair and this Act is no exception. The good news is there is a lot of short term relief, but no real long term considerations. Let’s get to the nuts and bolts of the deal:

Income Tax Rates:

The current income tax rates (10%, 15%, 25%, 28%, 33% and 35%) will be retained for two years (2011 and 2012). The top rate of 15% on qualified dividends and long-term capital gains will be retained for two years as well.

AMT Patch extension:

A two-year AMT "patch" for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.

Payroll Tax Reduction:

Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.

Tax Credits Extended:

Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.

Estate Tax Rate/Exemption:

After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.

Bonus Depreciation Extended:

Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.

As you can see, the government is still in the giving mood when it comes to tax issues. While this is great in the short term, the deal just adds hundreds of billions in debt to the national debt. Bond holders are not going to be happy about this and we already see them raising rates in an effort to get around it. At some point, the bill on all this debt is going to come due. That is going to be a scary day, so enjoy things while you can.