On December 17, 2010, the president signed into law an S858 billion federal tax package. The main elements of the legislation are a two-year extension of the reductions of income. Capital gains and dividend taxes enacted during (he Bush Administration and a one-year extension on unemployment insurance benefits that had ended as of December 1. Although many parts of the package are of relatively short duration, below are some highlights of the new tax law:

For 2011 and 2012 the maximum estate tax raw will be 35%.with a $5 million exemption per person.

Your Paycheck

Beginning in January 2011, a 2% drop in an employee’s share of the Social Security portion of the FICA tax, from 6.2% to 4.2%; will increase take-home pay for most workers. For example, this means an additional SI, 600 in 2011 for someone making S80.000 a year.

There will be a two-year extension of the 2001 and 2003 income tax cuts from the Bush era. This means that, at least through 2012, the tax rates will remain at the current levels, based on income: 10%, 15%, 25%, 28%, 33% and 35%.

The extension of certain tax benefits also means that for those making less than $90,000 a year (S180.000 for married couples), there will continue to be a $2,500 tax credit to help pay for college tuition. This American Opportunity Tax Credit had been scheduled to expire at the end of 2010. The Child Tax Credit, which had been set at $500, has been hiked to $1,000.

The new law also lifts the exemption levels for the alternative minimum tax (AMT), sparing millions of middle income taxpayers from being subjected to the AMT.

Your Investments

Without action by Congress. 2011 tax rates on the profits of assets sold after more than a year would have increased to 20% and dividends would have reverted to being taxed at ordinary income rates. Instead, rates on long-term capital gains and for dividends on certain stocks held longer than 60 days will stay at 15% through 2012. Maintaining the status quo also means that taxpayers in the two lowest income tax brackets will continue to have a 0% capital gains rate.

Your Estate

In 2009, there was a maximum estate tax rate of 45% and a $3.5 million exemption. The estate tax temporarily disappeared in 2010. Under the new law, for 2011 and 2012 the maximum rate will be 35%, with a $5 million personal exemption. Any unused exemption may be passed to a surviving spouse, so that a married couple can exempt up to $10 million. In keeping with the short-lived nature of many parts of the new law, without further legislation there will be a 55% estate tax rate in 2013 and an exemption of just $1 million per person.

Your Retirement

The new tax law continues provisions that permit investors who are 70-1/2 or older to make a qualified distribution of up to $100,000 from an IRA directly to a qualified charity for 2010 and 2011. However, the new law did not preserve what had been a suspension of minimum required distributions (MRDs). To avoid a stiff penalty, retirees generally must take MRDs from their retirement accounts for the year in which they turn 70-1/2, and all years after that, no later than the last day of the calendar year.