On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“Act”). In addition, in early 2011, Illinois legislation was passed increasing the individual and corporate income tax rates. The new federal and state legislation will have a dramatic impact on how you prepare your 2010 and 2011 income tax returns. Listed below is a brief summary of portions of the legislation.

Individuals

The reduced Individual income tax rates (10, 15, 25, 28, 33, and 35 percent) have been extended through 2012.

Personal income tax in Illinois has been raised to 5%, effective January 1st of this year.  This increase is up from 3%, and will remain in effect until 2015, when the Illinois individual income tax is scheduled to decrease to 3.75% and remain at that rate through the year 2024, when it is scheduled to decrease to 3.25%.  These Illinois rates apply to individuals, estates, and trusts.

Capital Gains Tax Rates and Dividend Tax Rates remain unchanged.  Individuals in the 10% and 15% tax brackets will have a zero percent capital gains and qualified dividend tax rate, while other individuals with long term capital gains and qualified dividends will be taxed at a maximum 15% tax rate.  These rates will remain in effect through December 31, 2012.

Alternative Minimum Tax (“AMT”) exemptions are temporarily increased (patch) for 2010 and 2011.  For 2010, the individual exemption amount has been increased from $46,700 to $47,450, and the married filing jointly exemption has been increased from $70,950 to $72,450.  For 2011, the individual exemption amount is $48,450 and for married individuals filing jointly the exemption amount is $74,450.  These higher exemption amounts are designed to prevent some middle income earners from being subject to the AMT.

Social Security Tax Rates will be temporarily reduced by 2%.  For 2011, only the employee portion of social security taxes will be 4.2%, instead of the previous 6.2% rate.  This is paid in on the first $106,800.00 of compensation.  The employer portion of social security tax remains at 6.2%.  According to the IRS, this reduction will not affect an employee’s future Social Security benefits.

Tax Credits under the Act include enhancements to the child tax credit, earned income credit, adoption tax credit, and dependent care credit.  These credits will continue through 2012.  The credit for individuals who make energy efficient home improvements has been extended through 2011.

Individual Tax Deductions have been extended for 2010 and 2011.  Some of these include deductions for student loan interest, classroom expenses for teachers, and a state and local sales tax deduction.

Charitable Contributions and IRA Distributions: Taxpayers age 70 ½ or older can take a tax free distribution up to $100,000, when made from an IRA and paid directly to a qualified charitable organization.  This incentive continues through 2011.

Making Work Pay: The “Making Work Pay” credit, which was part of the 2009 Recovery Act, expired on December 31, 2010 and was not renewed.  The credit was worth $400 to taxpayers making $75,000 or less ($800 to married couples earning under $150,000).

Businesses

Self-Employment Tax is reduced from 12.4% to 10.4% in 2011.  Self-employed individuals will pay 10.4% on the net self-employment income up to $106,800.

Illinois State Corporate Income Taxes have been increased from 4.8% to 7%.  This increase will remain in effect until 2015, when the Illinois corporate tax rate will go back to 4.8%.

Bonus depreciation has been extended and doubled from 50 percent to 100 percent for qualified property placed in service before January 1, 2012.

Sec. 179 expensing has been extended through December 31, 2012.

Estate Tax

The federal estate tax has been reinstated through December 31, 2012. The maximum rate is 35 percent with $5 million exclusion amount. The legislation allows “portability” between spouses of the estate tax exclusion amount. For years beginning January 1, 2013, the exclusion amount and rate are scheduled to be $1 million and 55 percent respectively.

The Illinois estate tax has been reinstated, with an exclusion amount of $2 million, and a graduated rate scale ranging from 7.2 percent to 16 percent.