Other groups that stand to benefit:
A cut in Social Security payroll taxes
The compromise decreases Social Security payroll taxes to 4.2% from 6.2% for one year. The White House estimates the payroll tax cut will reduce taxes by $120 billion next year for 155 million workers.
The payroll tax cut will save a worker with annual income of $40,000 about $800 a year. A worker with $70,000 in income will save $1,400.
Unlike the income tax cuts, which benefit only workers who earn enough to owe federal income taxes, the payroll tax cut affects just about every working American.
Other individual tax breaks extended through 2011:
•A provision that allows taxpayers who itemize to deduct state and local sales ta xes. This provision gives taxpayers the option of deducting state and local sales taxes instead of state income taxes. This provision mainly benefits taxpayers in the seven states that impose no income tax, but charge state sales taxes.
•A deduction of up to $250 for educators who spend their own money on classroom suppl ies. This is an above-the-line deduction, so teachers don't have to itemize to claim it.
•A tax credit for taxpayers who make energy-efficient improvements to their homes. However, the legislation pares back a more generous 30% credit included in the economic stimulus bill. Homeowners will be eligible for a 10% credit, up to specific maximum amounts, if they install insulation or energy-efficient windows or roofs. Taxpayers will also be eligible for credits ranging from $50 to $150 for purchases of energy-efficient fans, water heaters and furnaces.
13-month extension of jobless benefits
The agreement extends jobless benefits for the long-term unemployed by 13 months, through the end of 2011. Without the extension, 7 million unemployed workers would have lost their benefits by next November.
Charitable contributions from IRAs
The bill extends through 2011 a provision that allows seniors who are 70½ or older to donate up to $100,000 from their individual retirement accounts to charity. The contribution isn't tax-deductible, but the withdrawal won't be included in the IRA owner's taxable income for the year. That feature has made the provision particularly popular with seniors who have paid off their mortgages and don't have enough deductions to itemize.
The withdrawal also counts towards the IRA owner's minimum distribution for the year. IRA owners who are 70½ or older are required to withdraw a minimum amount every year and pay taxes on the withdrawal, whether they need the money or not.
Because the legislation was enacted so late in the year, many seniors may have already taken their minimum distributions for 2010. The legislation doesn't appear to provide relief for IRA owners who would like to reverse the distribution and give the money to charity, says Mark Joseph, a financial planner in Reston, Va.
However, the legislation does give seniors who postponed taking a distribution a little more time. Seniors have until Jan. 31, 2011, to make a contribution from their IRA to charity and have it count toward their 2010 required minimum distribution.
Mortgage insurance deductions 'til 2011
A deduction for mortgage insurance premiums will be extended through 2011. Most homebuyers who put less than 20% down on a home loan have to pay mortgage insurance, which is designed to protect lenders from default.
However, a tax break targeted at homeowners who don't itemize wasn't extended. This tax break allowed homeowners to increase their standard deduction by the amount of their state and property taxes, up to $500 for single homeowners or $1,000 for married couples. This
tax break expired at the end of 2009; because it wasn't renewed, homeowners won't be able to claim this deduction on their 2010 tax return, according to tax publisher CCH.
Child tax credits, education breaks
The child tax credit will be extended for two years. This credit allows eligible families to reduce their federal tax bill by up to $1,000 for each qualifying child under age 17. In addition, the expansion of the Earned Income Tax Credit included in the economic stimulus package will continue for two more years.
The agreement also extends several tax breaks designed to reduce the cost of paying for college, including:
•The American Opportunity Credit, which is designed to offset the cost of colleg e. The credit, extended through 2012, provides a tax credit of up to $2,500 per college student per year. Taxpayers can claim the credit for up to 100% of the first $2,000 in qualified college costs and 25% of the next $2,000. To get the full credit, you'll need to spend at least $4,000 on qualified expenses.
Forty percent of the credit is refundable, so a low-income family that doesn't owe federal taxes could receive a check from the government for up to $1,000.
In addition, the income limits on this credit are broader than limits on the Hope and Lifetime Learning Credits, which have been around since the Clinton administration. Married couples with modified adjusted gross income of up to $160,000 can claim the full credit.
•Coverdell Savings Accounts. The tax agreement allows families to contribute up to $2,000 a year to these tax-advantaged accounts through 2012. Without the extension, the maximum annual contribution to these accounts would have dropped to $500 in 2011. Unlike the more widely used 529 college savings accounts, money from Coverdell accounts can also be used for elementary and secondary private school expenses.
•Student loan deduction. A provision that allows student-loan borrowers to deduct up to $2,500 in interest on federal student loans will be extended through 2012. Without the extension, the deduction would have still been available, but with lower limits for eligible borrowers.
No increase in capital gains tax rate
The top tax rate for capital gains and dividends will remain at 15% through 2012, or 0% for taxpayers in the 10% and 15% tax brackets, through 2012. If the tax cuts had been allowed to expire, the top rate for capital gains would have risen to 20% next year. The top rate for dividends would have risen to the investor's ordinary income tax rate — up to 39.6% for the wealthiest taxpayers.
Estate tax exemptions; brakes on AMT
The compromise exempts estates valued at less than $5 million per person from estate taxes. For estates that exceed that threshold, assets over $5 million per person will be taxed at a 35% rate.
The federal estate tax expired at the end of 2009, allowing heirs of wealthy people who died this year to inherit millions of dollars tax-free. It was scheduled to return next year at a higher rate: 55% on estates valued at more than $1 million.
The agreement includes a stopgap measure to prevent the alternative minimum tax from spreading rapidly. Without the agreement, up to 25 million taxpayers would be subjected to the AMT in 2010, up from 3.9 million in 2009, according to an analysis by H&R Block. Those taxpayers would owe an average of $3,000 to $5,000 in additional taxes, the analysis said.
The agreement extends until 2012 repeal of a provision that limited the amount of personal exemptions high-income taxpayers could claim.