If you’d like a VERY quick reminiscence of the more dramatic news stories of 2010, here’s a one-minute video that covers earthquakes, Wikileaks, North Korea, BP oil spill to Prince Williams engagement to name a few all within 60 seconds!:

http://www.reuters.com/news/video/story?videoId=168879529&videoChannel=2602.

If, after that viewing, you need comic relief, please relax for six minutes with the most-watched YouTube video of all time: http://www.youtube.com/watch?v=dMH0bHeiRNg .

Now that you are both scared and entertained, following is the latest in tax news.

Not included in the dramatic news story montage but affects your financial well-being as much, if not more, is the recent passage – and presidential signing – of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This passage represents an $858 billion package of renewed tax cuts, unemployment benefits and, believe it or not, fixes to the uncertainty surrounding the estate tax and alternative minimum tax.  Economists expect the bill to raise U.S. economic growth by one percentage point in 2011, perhaps definitively avoiding a double-dip recession.  Are these the same economists who missed the economic meltdown until it burst upon us?  The bill will also raise America’s $14 trillion government debt by about another $1 trillion.

This enactment makes tax planning a bit easier for all of us by freezing current income tax rates for the next two years.  Under the EGTRRA 2001 act, taxes on dividends and capital gains were set to jump from a current 15% all the way up to 40%, and the highest ordinary income tax rates were set to rise from 35% to 39.6%, causing us to look hard at shifting capital gains and income into the 2010 tax return.  Interestingly enough, after the legislation that keeps our tax status quo, U.S. tax rates are now the third-lowest of all 34 members of the Organization of Economic Cooperation and Development (OECD).  (Only Mexico and Chile have lower rates; France, as you might expect, has the highest rates.)

The bill will also put money in the hands of taxpayers starting in January, when the FICA payroll tax which funds the Social Security retirement system is reduced from 6.2% to 4.2%.  Although the reduction weakens the already shaky finances of Social Security, it has some limits:  the FICA portion only applies to the first $107,000 of income – and the bill provides no reduction in the matching FICA tax for employers; nor does it reduce the 2.9% (1.45% each for employer and employee) Medicare tax collected on all income, so it does not weaken Medicare’s solvency.   Congress also extended the $2,500 college tax credit and $1,000 child tax credit, both of which phase out at higher income levels; and the bill continues to repeat the annual ritual of rescuing middle-class taxpayers from having to pay taxes under the alternative minimum tax.

The unemployed will receive 13 additional months of unemployment insurance benefits and there was a grab-bag of provisions for businesses, including the ability to write off, for tax purposes, 100% of capital investments in 2011 and 2012.  The research and development tax credit was extended, and so too was a tax credit for biodiesel fuel manufacturers, a higher excise tax rebate for rum distilled in Puerto Rico and the U.S. Virgin Islands, and an economic development credit to American Samoa.   The Act also extends the IRC code Section 1603 energy grants for another year!

One of the most complex and interesting provisions involves the estate tax.  Under EGTRRA, the estate tax – which had been phased out completely in 2010 – was set to return with a vengeance in 2011: anything over $1 million left to heirs would be subject to an estate tax of up to 50% at the top marginal rate.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 sets a new exclusion amount of $5 million per spouse, $10 million for couples, and anything received by heirs above that amount will be taxed at 35%.  The unified credit – which was one of the more sane aspects of the estate tax provision that was lost under the Bush tax cuts – has returned.  The lifetime gift tax exemption has been raised from $1 million per spouse to $5 million; persons who had already given at the old limit will be able to pass on an additional $4 million, either directly or in trust.

The catch is that everything in this tax bill – all of these amounts and rates – will expire in two years, so that in 2013, unless Congress acts again, the ordinary income, dividend, capital gains, estate tax and FICA taxes will all go up to the rates they were in 2002.  Between now and then, you can expect a lot of talk in Congress and from the White House about “reforming” or “simplifying” our byzantine tax system.   You can also expect lobbies to continue to influence these bills.

However, two years of certainty (however certain “certainty” is) is excellent for the economy as it allows businesses and individuals to feel a more solid structure, a container to start and make plans.  We only hope that this little act of sanity is the beginning and not the last token of responsibility coming out of Washington during the next phase of the Obama Administration.   Let’s view these next two years as a viable opportunity to manifest all of the dreams and financial plans that you hold dear.

Tax package provisions (general):http://www.reuters.com/article/idUSTRE6BG5IS20101217 

http://www.reuters.com/article/idUSTRE6BG3CJ20101217 

Third-lowest among OECD members:http://www.reuters.com/article/idUSTRE6BE3XT20101215 

Additional provisions: http://articles.cnn.com/2010-12-14/politics/tax.bill.other.items_1_tax-bill-sweeteners-bush-tax-cuts?_s=PM:POLITICS 

Estate tax provisions: http://www.nytimes.com/2010/12/18/your-money/taxes/18wealth.html?src=me&ref=your-money