How Will the New Tax Law Affect Your Nonprofit, Your Employees, and the People You Serve?

Yesterday Congress passed the $857 billion tax package negotiated by President Obama and congressional Republicans. President Obama is expected to sign the legislation today.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (H.R. 4853) has numerous components of interest and concern to nonprofits – as employers and as mission-based organizations involved in local communities. This list presents portions of interest to most nonprofits, nonprofit employees, and the people they serve:

• Tax Rates Maintained: All of the individual tax rates put in effect in 2001 and 2003 are maintained through 2012, including those for upper-income tax brackets. Most immediately, this means that nonprofit and other employers will not have to adjust employee withholdings for income taxes.
• Individual Payroll Taxes Reduced: Employees receive a two percent reduction in the Social Security tax they pay. For 2011, nonprofit and other employers will need to reduce the individual's share of payroll withholding from 6.2 percent to 4.2 percent. To illustrate what this change means, an individual earning $50,000 will see $1,000 in tax savings.
• Estate Tax: The bill restores and reduces the federal estate tax at a rate of 35 percent and increases the exemption level to $5 million, two changes that many fear will eliminate previous incentives for the wealthy to give.
• Charitable Giving Incentives: The IRA rollover and other expired charitable giving incentives (promoting donations of food, land, computers, and books) are restored for the remainder of 2010 and through the end of 2011, which should help promote giving.
• Unemployment Benefits: The legislation extends the enhanced program of 99-weeks of unemployment benefits through 2011. This allowance may prevent additional strain that would have hit many nonprofits that provide services to those with no income.
• Alternative Minimum Tax: Middle-income taxpayers will not be subject to the alternative minimum tax in 2010 and 2011 because the bill renews a "patch" that limits the application of the AMT to approximately four million upper-income individuals. Without this patch, many taxpayers would have seen an automatic increase in their tax rates.

The following link will take readers to a 12-page summary that provides greater detail about the bill, including provisions that might be of interest to particular nonprofits (e.g., those providing child care, adoption assistance, certain education): Summary of the Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Also, the IRS just released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011. See Notice 1036.

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