President Obama Signs Tax Bill

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On Friday, December 17, President Obama signed tax legislation that extends the current income tax rates and capital gain rates for two years.  Below are the income tax rate schedules.

The capital gain rate will remain 15% for long term capital gains.

Single Filing Status
[Tax Rate Schedule X, Internal Revenue Code section 1(c)]

  • 10% on income between $0 and $8,375
  • 15% on the income between $8,375 and $34,000; plus $837.50
  • 25% on the income between $34,000 and $82,400; plus $4,681.25
  • 28% on the income between $82,400 and $171,850; plus $16,781.25
  • 33% on the income between $171,850 and $373,650; plus $41,827.25
  • 35% on the income over $373,650; plus $108,421.25

Married Filing Jointly or Qualifying Widow(er) Filing Status
[Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)]

  • 10% on the income between $0 and $16,750
  • 15% on the income between $16,750 and $68,000; plus $1,675
  • 25% on the income between $68,000 and $137,300; plus $9,362.50
  • 28% on the income between $137,300 and $209,250; plus $26,687.50
  • 33% on the income between $209,250 and $373,650; plus $46,833.50
  • 35% on the income over $373,650; plus $101,085.50

Married Filing Separately Filing Status
[Tax Rate Schedule Y-2, Internal Revenue Code section 1(d)]

  • 10% on the income between $0 and $8,375
  • 15% on the income between $8,375 and $34,000;plus $837.50
  • 25% on the income between $34,000 and $68,650; plus $4,681.25
  • 28% on the income between $68,650 and $104,625; plus $13,343.75
  • 33% on the income between $104,625 and $186,825; plus $23,416.75
  • 35% on the income over $186,825; plus $50,542.75

Head of Household Filing Status
[Tax Rate Schedule Z, Internal Revenue Code section 1(b)]

  • 10% on the income between $0 and $11,950
  • 15% on the income between $11,950 and $45,550; plus $1,195
  • 25% on the income between $45,550 and $117,650; plus $6,235
  • 28% on the income between $117,650 and $190,550; plus $24,260
  • 33% on the income between $190,550 and $373,650; plus $44,672
  • 35% on the income over $373,650; plus $105,095

The legislation reinstates the estate tax with a 35% rate and a $5 million exclusion from estate tax, retroactive to January 1 2010.  The Generation Skipping Transfer Tax exemption will be $5 million, which will be indexed after 2011.  The bill re-enacts the rule that steps up the basis of inherited assets at their date-of-death value.  It lets estates of decedents who died in 2010 elect to use the rules that had been in place in 2010, with no estate tax but a limited step up in the basis of inherited assets.

The $5 million exclusion is also unified with the gift tax exclusion, at least for 2011 and 2012.  For a number of years, the gift tax lifetime exclusion was $1 million, which is the case for 2010 gifts.

The $5 million estate tax exemption is also “portable.”  That means if a spouse dies leaving a surviving spouse after 2010 without using all of the $5 million exemption, the unused portion is added to the lifetime exemption of the surviving spouse.  This will greatly simplify many estate plans.

All of these income, estate and gift tax rules are enacted only through 2012