Federal Tax Update

The Bush tax cuts were scheduled to expire December 31, 2010. The newly enacted Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provides for current rates to remain in effect through December 31, 2012.

1. The federal tax rate for individuals – as well as the benefits from deductions – can vary from no tax at all to tax rate of 35%.

The most common federal tax rates for individuals are:

  • 15% for net long term (one year or more) capital gains and qualified dividends.
  • 28% tax rate applies to ordinary AMT income in excess of $175,000, net of any allowable exclusion.
  • 35% maximum rate for ordinary taxable income from $373,650.

2. Social security (FICA) and medicare tax totally 7.65% on the first $106,800 of 2010 wages and self-employment income was reduced in 2011 with 2% for the employee’s portion of the wages, a tax benefit of $2136 for individuals earning the FICA maximum of $106,800. The employer’s share was not reduced. The self-employment tax rate is 13.3% in 2011 (15.3% in 2010)

3. Business equipment. There is a significant increase in the immediate expensing of business equipment purchases.

Section 179 expensing rules allow deductions up to $500,000 of qualifying property placed in service during taxable years beginning in 2010. Computer software continues to be eligible for expensing as long as it is placed in service prior to 2012. Also 100% bonus depreciation applies for qualified investment made on or after September 9, 2010 and before December 31, 2011 and 50% bonus depreciation on qualified property placed in service effective for 2012.

This article is based on one published in Kauppalehti on December 14, 2010. (In Finnish)