The Act now extends most of the provisions of two separate tax relief laws, which were set to expire, until the end of 2012.  It offers citizens a variety of benefits, primarily in the areas of estate tax and individual income tax.

Individual Income Tax Rates

As part of the Bush Tax Cuts extension, the Act extended the expiration date on income tax rates an additional two years. The current income tax rates (top federal income tax bracket is 35% and the lowest income tax bracket is 10%) will remain the same for the next two years.

By keeping the rates unchanged, 2010 Roth conversions are more valuable. Individuals can opt for the two-year deferral and no additional costs are incurred.

Long-term capital gains and dividend tax rates stay at 15% if your taxable income is in the 25% tax bracket or higher, or 0% if your taxable income is in the 15% tax bracket or lower.

Estate Tax

Under the new tax revisions, the estate tax rates are simply shortened by the Act at the top marginal rate of 35%. The brackets between 18% and 34% remain exactly the same, and the 35% bracket is imposed as the maximum rate.

The exemption amount has been raised to $5 million per person or $10 million per couple. Exemptions are portable between couples. This amount is indexed for inflation in multiples of $10,000 beginning in 2012. Starting January 1, 2013, the applicable exemption amount will revert back to $1 million as it was scheduled to under previous legislation. The $5 million exemption amount is also applicable to gift taxes and the generation-skipping transfer tax.

As a result, more Roth IRAs and traditional IRAs will pass estate tax-free, and inherited Roth IRAs will not only be income tax-free but also estate tax-free.

Charitable Contributions

Required minimum distributions (RMD) that have not been met in 2010 can still be taken and allocated as a donation to a specific charity until the end of January 2011.  If one does not want to donate the IRA distribution to charity, then the 2010 RMD must be taken by year-end as usual.  If it is not timely taken, the 50% penalty on the amount not taken will apply. 

The Bottom Line

There are plenty of provisions to the Tax Relief Act, including the extension of charitable IRA distributions and land conservation easements, and these changes provide many tax planning opportunities for individuals.

It is important to remember that the Act is essentially a two-year patch to prevent economic damage from tax provisions that are expiring at an inconvenient time. This will all have to be revisited in two years, when the political party balance in Washington may be very different than it is today. 

The national tax provisions can be complicated.  For questions, please seek the advice a financial professional. 

Submitted by Jim Sandager, MBA, CFP  

Senior Vice President-Financial Advisor at Wealth Enhancement Group and co-host of "Your Money" on News Radio 1040 WHO on Sunday mornings.  Securities offered through LPL Financial, member FINRA/SIPC.

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