IN BRIEF: The 2010 Tax Relief Act

On December 17, 2010, the U.S. Congress approved an $858 billion tax deal between President Barack Obama and the Republicans that will boost the economy but add to the budget deficit. Here is a summary of key components of the bill:

  1. The current individual tax rates will remain the same for the next two years, with a top rate of 35%. This includes rates for the wealthiest 2%, which Obama had originally opposed.
  2. Any capital gains will remain at the rate of 15%, an historic low. The Democrats had originally sought a top rate of 20%.
  3. The tax rate on stock dividends will also remain at 15%, as long as you have held the stock for at least two months.
  4. The Alternative Minimum Tax was patched for another two years, forestalling higher taxes for 20 million citizens.
  5. Federal benefits for the unemployed will be extended for the next 13 months (for a total of 99 weeks).
  6. A 2% reduction in the social security (FICA) tax, reducing the employee’s contribution of 6.2% to 4.2%. (Sorry, employers, your side remains at the full tax rate of 6.2%). This will mean $1,000 of increased take-home pay for every $50,000 earned. Most economists think this will help jump-start the economy immediately since the money will be spent with every paycheck. (Interestingly, for the majority of working people, the government collects more money for FICA than it does in income taxes.)
  7. Obama conceded to Republican demands on the estate tax—35% after a $5 million individual exemption.
  8. A $2,500 annual college tax credit favored by Obama will be extended for two years.
  9. The bill boosts the earned income tax credit, which benefits low-earning working individuals.