Posted on December - 22 - 2010

New Law Extends Tax Relief, Reinstates Estate & Gift Tax

Key Provisions of the Tax Relief Act of 2010

Incentives for Individuals

Federal Estate & Gift Taxes

Incentives for Businesses

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, or H.R. 4853 (hereafter, “the Act”). The bipartisan legislation extends for two additional years many of the so-called “Bush-era tax cuts” originally enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

Key provisions of the new law extend the individual and capital gains/dividend tax cuts for all taxpayers through 2012, enact a payroll tax cut for 2011, provide a two-year AMT patch, establish a top estate tax rate of 35 percent with an exclusion of $5 million, create 100-percent bonus depreciation through 2011 and 50-percent bonus depreciation through 2012, and expand Code Sec. 179 expensing and investment limits for 2012.

INCENTIVES FOR INDIVIDUALS

Individual Income Tax Rates

The Act extends all individual income tax rates at their 2010 levels for two additional years through December 31, 2012. Under EGTRRA, the rates were originally scheduled to revert to pre-2001 levels beginning January 1, 2011. The 35-percent tax bracket will continue to be the top rate. Extending these rates further will likely be a contentious issue in the 2012 presidential election campaign.

Capital Gains/Dividends Tax Rates

The Act extends the current maximum tax rate for qualified long-term capital gains and dividends (i.e., 15 percent for most taxpayers, and zero percent for taxpayers in the 10-15 percent tax brackets) through December 31, 2012.

Qualifying dividends are those dividends received from a qualified domestic or foreign corporation, on which the underlying stock is held for at least 61 days within a specified 121-day period. The Act also extends the qualified dividend treatment for dividends passed through from a regulated investment company (RIC), real estate investment trust (REIT), or other qualified pass-through entities.

Payroll Tax Cut

The Act reduces the employee-share of Social Security Old-Age, Survivors, and Disability Insurance (OASDI) taxes from 6.2 percent to 4.2 percent for wages earned in 2011 up to the taxable wage base of $106,800. The employer’s share remains at 6.2 percent. Likewise, the share for self-employed individuals is reduced 2 percent down to 10.4 percent of income up to the threshold.

Alternative Minimum Tax (AMT) Patch

The Act includes an AMT patch, increasing the exemption amounts for 2010 to $47,450 for individuals, $72,450 for joint filers, and $36,225 for married taxpayers filing separately. For 2011, the exemption amounts increase to $48,450, $74,450, and $37,225 respectively.

Relief from the Marriage Penalty

The Act increases the basic standard deduction for a married couple filing jointly to twice that of a single individual through December 31, 2012, effectively extending relief from the marriage penalty as originally provided under EGTRRA. The Act also continues the expanded size of the 15-percent bracket for married couples filing jointly to twice the size of the bracket for single filers.

Child Tax Credit Extension

The Act extends the $1,000 child tax credit for two years through December 31, 2012, including enhancements made to the credit by EGTRRA and subsequent legislation. The credit continues to phase out for taxpayers with adjusted gross incomes of $110,000 for joint filers, $75,000 for other filers.

Tax Incentives for Education

The Act extends the following tax credits and deductions related to education expenses for two years through December 31, 2012, subject to the same income limitations and phase-out guidelines as before:

  • The American Opportunity Tax Credit (AOTC)
  • The exclusion of employer-provided education assistance (up to $5,250) from income and employment taxes
  • The 60-month rule for the $2,500 above-the-line deduction for student loan interest deduction
  • The $2,000 maximum contribution amount for Coverdell Education Savings and the eligibility of primary and secondary school expenses as qualified expenses

Residential Energy Property Credit

The Act extends the residential energy property credit, with some limitations, for one year through December 31, 2011. The credit is equal to 30 percent of the sum of expenditures for qualified energy-efficient improvements and property, limited to $500. Qualified property includes exterior windows and doors, water heaters, insulation, furnaces, and other qualifying purchases.

Other Tax Extenders for Individuals

The Act extends the following provisions, most for two years through December 31, 2012:

  • EGTRRA’s repeal of the personal exemption phase-out
  • EGTRRA’s repeal of the Pease limitation on overall itemized deductions
  • EGTRRA’s increased adoption credit dollar limitation and income exclusion for employer-paid or reimbursed adoption expenses of $10,000
  • Enhancements made to the Earned Income Tax Credit (EITC) under EGTRRA and subsequent legislation
  • Enhancements made to the dependent care credit under EGTRRA
  • Mortgage insurance premium deduction (extended for one year)

The Act also extends the following incentives, which had expired at the end of 2009, for two years through December 31, 2011:

  • State and local sales tax deduction
  • Higher education tuition deduction
  • Classroom expense deduction for teachers
  • Exclusion from income for charitable contribution of IRA proceeds
  • Deduction for charitable conservation contributions of appreciated property
  • District of Columbia first-time homebuyer credit

FEDERAL ESTATE & GIFT TAXES

The federal estate tax was scheduled to revert to its pre-EGTRRA levels (i.e., a maximum tax rate of 55 percent and a $1 million exclusion) beginning January 1, 2011. The Act reinstates the estate tax for decedents that die after December 31, 2009 but before January 1, 2013 at a maximum rate of 35 percent with a $5 million exclusion. The exclusion amount is adjusted for inflation for decedents that die in 2012. The Act also replaces the modified carryover basis rules with the stepped-up basis rules that were applicable until 2010.

The Act grants estates of decedents that die after December 31, 2009 but before January 1, 2011 the option to elect whether or not to apply either the reinstated estate tax (i.e., the 35-percent maximum rate and $5 million exclusion) with stepped-up basis, or no estate tax with the modified carryover basis rules allowable for 2010 under EGTRRA. The Act further grants the estates of decedents that die after December 31, 2009 and before December 17, 2010 additional time to file any return or make any payment.

The Act also provides for some portability of the maximum exclusion between spouses after December 31, 2010. This provision allows a surviving spouse to increase his or her maximum exclusion amount by claiming the unused portion of his or her deceased spouse’s estate tax exclusion.

This opportunity, which effectively enables married couples to protect up to $10 million, is only available when the proper election is made on a timely filed estate tax return. Should a surviving spouse be predeceased by more than one spouse, the exclusion amount would be limited to the lesser of $5 million or the unused exclusion of the most recently deceased spouse.

Additional Extended Provisions

The Act extends the following provisions, most for two years:

  • EGTRRA’s state death tax deduction
  • EGTRRA’s provisions regarding conservation easements
  • EGTRRA’s provisions regarding small and family-owned businesses
  • the availability of estate tax installment payments for closely held businesses

Gift Tax Rate

For gifts made in 2010, the Act provides a gift tax rate schedule that has a maximum tax rate of 35 percent with a $1 million exclusion. For gifts made after December 31, 2010, the Act recouples gift and estate taxes to apply a maximum rate of 35 percent with a $5 million exclusion.

Generation-Skipping Transfer (GST) Tax

The Act extends some technical provisions enacted under EGTRRA that effect the GST tax, and provides an exemption of $5 million (equal to the estate tax exclusion) with a GST tax rate of zero percent for transfers made in 2010. For transfers made after 2010, the GST tax rate would equal the highest estate and gift tax rate in effect for the year in which the transfer occurs. For example, in 2011 and 2012, this rate would be 35 percent.

INCENTIVES FOR BUSINESSES

Bonus Depreciation

The Act increases 50-percent bonus depreciation to 100-percent for qualified investments in new, original-use property made after September 8, 2010 through December 31, 2011. The Act also allows 50-percent bonus depreciation for qualified property placed in service after December 31, 2011 and before January 1, 2013. Transportation property and certain longer production period property is eligible for 100-percent expensing if placed in service before January 1, 2013. This provision is available for all businesses and is not subject to a dollar-level cap.

Expanded Code Sec. 179 Expensing

Under the Small Business Jobs Act of 2010 (SBJA), Code Sec. 179 expensing was expanded to give businesses the option of writing off the cost of qualifying capital expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. SBJA increased the maximum deduction from $250,000 to $500,000 and the investment limit from $800,000 to $2 million for tax years beginning in 2010 and 2011.

In 2012, the expensing and investment limits were scheduled to revert to their pre-2008 Stimulus Act levels of $25,000 and $200,000, respectively, not indexed for inflation. Under the new law, the maximum deduction will increase from $25,000 to $125,000 for 2012, and the investment limit from $200,000 to $500,000. The new law also treats off-the-shelf computer software placed in service prior to 2013 as qualifying property.

15-Year Recovery Period for Qualified Leasehold Improvements

The Act extends the accelerated depreciation allowance for qualified leasehold improvements, restaurant buildings, and retail improvements over a 15-year recovery period instead of a 39-year recovery period. Originally enacted under the Emergency Economic Stabilization Act of 2008 (EESA), this provision applied to leasehold improvement property placed in service by December 31, 2009. Qualified leasehold improvement property is any improvement to an interior portion of nonresidential real property (i.e., commercial property) provided that the following requirements are met:

  • The improvement is made under, or pursuant to, a lease by the lessee, lessor or any sublessee to an interior portion of a building
  • The improvement is made to a structural component of a building and is not classified as personal property (i.e., equipment or furniture)
  • The lease cannot be between related parties
  • The interior portion of a building has to be occupied exclusively by the lessee in that portion of the building
  • The building has to be more than three years old

Qualified restaurant property is any real property which is an improvement to a building that is more than three years old and devotes more than 50 percent of the building’s square footage to the consumption of prepared meals. Qualified retail improvement property is an interior improvement to a building used for retail business if the building is at least three years old when the improvement is made.

Research Tax Credit

The Act renews the Code Sec. 41 research tax credit that expired at the end of 2009 for two years through December 31, 2011. The Act also extends the provision, originally enacted under the American Reinvestment and Recovery Act of 2009 (ARRA), that allows corporations to monetize unexpired AMT and research and development (R&D) credits by electing out of bonus depreciation. Companies that have been operating at a loss or are subject to AMT are most likely to benefit.

Work Opportunity Tax Credit

The Act extends the Work Opportunity Tax Credit (WOTC) for new employees who start work after August 31, 2011 and before January 1, 2012. The WOTC is equal to 40 percent of up to $6,000 of the qualifying employee’s first-year wages, subject to certain restrictions. However, the two additional target groups added to the WOTC under ARRA (i.e., unemployed veterans and disconnected youth) are not included in the credit after 2010.

New Markets Tax Credit

The Act extends through December 31, 2011 the tax credit designed to benefit individuals and businesses that make qualified private investments in community development entities. The Act sets the maximum annual amount of qualified equity investments at $3.5 billion each year.

Energy Tax Incentives for Businesses

The Act extends several energy tax incentives for businesses, including the Energy-Efficient New Home Credit for qualified builders and manufacturers of homes purchased before January 1, 2012, and the Energy-Efficient Appliance Credit (extended for one year with modifications).

Other Tax Extenders for Businesses

The Act also extends the following business tax credits and incentives, most for two years (the 2010 and 2011 calendar years in most cases, tax years that begin after December 31, 2009 and before January 1, 2012 in others) unless noted otherwise:

Tagged Under : Gift Tax, Tax, Tax Relief

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