Employee Benefits/Tax-President Signs The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Which Affects Compensation and Benefits

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”). The Act affects compensation and benefits as follows:

— From Notice 1036 (see my blog entry for Dec. 20): for 2011, the employee tax rate for social security is decreased from 6.2% to 4.2%. The employer tax rate for social security stays at 6.2%. The 2011 social security taxable wage base is $106,800. Employers should implement the 4.2% employee social security tax rate as soon as possible, but not later than by January 31, 2011. After implementing the new 4.2% rate, employers should make an offsetting adjustment in a subsequent pay period to correct any over-withholding of social security tax as soon as possible, but not later than by March 31, 2011. For self-employed individuals, for 2011, the social security tax rate was reduced from 12.4 percent to 10.4 percent.

–Federal unemployment compensation benefits are extended for 13 months.

–The Work Opportunity Tax Credit is extended, with some modification, for hires through the end of 2011.

–The federal tax exclusion for transit passes and van pooling (combined), and for employer-provided parking (by itself), will be $230/month for 2011.

–Tax-free IRA distributions of up to $100,000, for charitable purposes, may be made by an individual at least age 70 and 1/2 during 2010 (retroactively) and 2011.

–The following were extended through the end of 2012: (1) the $1,000 child tax credit, the employer-provided child care tax credit and the American Opportunity Tax Credit (for education), (2) the improvements to the adoption tax credit, earned income tax credit and dependent care tax credit, (3) the employee tax exclusion, and the employer tax deduction, (in each case up to $5,250) for employer-provided educational assistance, and (4) the annual $2000 contribution limit for Coverdell Educational IRAs, and payment of elementary and secondary school expenses from this IRA.

Aside from provisions affecting compensation and benefits, the Act contains a significant number of general tax provisions, such as: (a) retaining the current individual income tax, dividend and capital gains rates through 2012, (b) having no itemized deduction limit or personal exemption phase-out through 2012, (c) a patch on the alternative minimum tax for 2010 and 2011, (d) an extension and increase in the bonus depreciation allowance for 2011, (e) an extension of the maximum amounts and phase-out thresholds for the Code section 179 depreciation deduction through 2012, (f) the extension of various tax credits for fuels and other energy costs and (g) a reduction in the top estate tax rate from 55% to 35%, with a corresponding increase to $5 million per spouse (with future inflationary increase for 2012) in the exemption from estate and general skipping transfer taxes, plus a revival of the step up basis rules for property, through 2012.

Interesting Point: Keeping the individual income tax rates at their current levels (they would have increased otherwise) could significantly help individuals who convert(ed) their traditional IRAs to Roth IRAs, or their retirement savings to an in-plan Roth account, in 2010 and elect to split the associated income and pay the taxes on this income in 2011 and 2012.