The recent passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act of 2010) extends for two years the reduced individual income, capital gains, and dividend income tax rates that were enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Therefore, for the 2011 and 2012 tax years, the reduced individual income tax rates remain at 10, 15, 25, 28, 33, and 35 percent, and the reduced maximum capital gains/qualified dividends tax rate of 15 percent (zero percent for taxpayers in the 10 and 15 percent tax brackets) continues to apply.

Other benefits for individuals that were extended by this multi-billion dollar tax package include:

Marriage penalty relief. A marriage penalty exists when the tax on the combined income of a married couple exceeds the sum of the taxes that would be imposed if each spouse filed a separate return as a single person.The Tax Relief Act of 2010 provides relief from the marriage penalty by extending for the 2011 and 2012 tax years:

• the increased standard deduction for joint filers equal to twice the inflation-adjusted amount of the standard deduction, and
• the increased income range of the 15-percent tax bracket for joint filers to twice the size of the corresponding bracket for single returns.

Phaseouts for higher-income individuals. For higher-income individuals, the limitation on the amount of allowable itemized deductions and the personal exemption phaseout do not apply to tax years beginning in 2011 and 2012.

Mortgage premium insurance deduction. Amounts paid or accrued for mortgage insurance premiums in 2011, and not allocable to a period after 2011 are treated as deductible qualified residence interest.

Earned income credit (EIC). For tax years beginning in 2011 and 2012, the applicable EIC percentage for taxpayers with three or more qualifying children is 45 percent, and broader AGI phaseout ranges apply. For joint filers, regardless of the number of qualifying children, the EIC phaseout amount is increased by $5,000. Various EIC enhancements provided by EGTRRA are also extended.

Child tax credit. The Tax Relief Act of 2010 provides a two-year extension, through 2012, of the $1,000 per qualifying child credit amount, and the offset of both regular tax and AMT liabilities by the nonrefundable component of the child tax credit.

Child and dependent care (CDC) credit. Certain EGTRRA-provided CDC credit enhancements are extended through December 31, 2012 by the Tax Relief Act of 2010, including:

• increased maximum CDC credit percentage of 35 percent;
• higher income limits for the CDC credit; and
• increased maximum amount of qualifying expenses to which the credit may be applied.

 Adoption benefits. The refundable nature of the adoption credit and the $13,170 dollar limit on the amount of the adoption credit and income exclusion for employer-provided adoption assistance are extended for tax years beginning before January 1, 2012. After December 31, 2011, the maximum amount of the credit and exemption decreases to $12,170, and the credit is no longer refundable. However, other changes made to the adoption credit and income exclusion by EGTRRA are generally extended through 2012.

Although the Tax Relief Act of 2010 provides some certainty in tax planning for the next two years, these provisions are temporary. The tax-favored rates, deductions, and credits will revert to pre-2001 levels in 2013 unless further action is taken by Congress.