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Dear HORAN Advisors:

 

The "Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010" will be soon signed into law by President Obama after approval by both chambers of Congress.  The House of Representatives cleared the tax package late into the evening of December 16, by a vote of 277-148, after a long debate over procedural rules.  The Senate had previously passed the measure by an overwhelming bipartisan supermajority of 81-19.
 
Many House Democrats vocally opposed the legislation - most notably the estate tax provision of the bill - but ultimately agreed to pass the tax compromise without amendment.  The passage of the tax deal means that dozens of tax provisions scheduled for expiration will now be extended for at least two years.  This includes, most significantly, marginal individual income tax rates, the estate and gift taxes (previously scheduled to revert to 55% with a $1 million exclusion), the Alternative Minimum Tax (AMT), and several business expensing and tax provisions (the so-called '2009 tax extenders'). Below is a summary of key elements of the soon to be tax law.
 
Estate and Gift Tax.   Under the legislation, the estate tax, gift tax, and GST tax are reinstated for two years at 35% with a $5 million exemption for individuals ($10 million for couples); the estate and gift tax lifetime credits are reunified, portability of unused credit for the surviving spouse is permitted; and the exemptions are indexed beginning January 1, 2012.  The increased exemptions for the estate and GST taxes are effective as of January 1, 2010.  To account for this retroactive reinstatement, taxpayers are given a choice between paying estate taxes in 2010, under this regime, or paying no estate taxes in 2010 and valuing assets under modified carryover basis rules.  The effective date for the increased gift tax exemption is January 1, 2011.  This provision reverses the 'de-coupling' that occurred under 2001 tax law (EGTRRA), and effectively reunifies the estate and gift taxes for gifts made after December 31, 2010. 
 
Income, Capital Gains, and Dividends Taxes.   Two-year extensions were agreed upon for all marginal income tax rate brackets (10%, 15%, 25%, 28%, 33%, and 35%).  If allowed to expire, tax rates would have climbed to 15%, 28%, 31%, 36%, and 39.6% respectively (the 10% rate bracket would have been eliminated). Additionally, capital gains and dividends taxes for those above the 25% rate bracket were also extended for two years.  The capital gains and dividends tax rate will remain at 15% through 2012.  If allowed to expire, dividends would have been taxed under ordinary income tax rates, and for the capital gains tax, those below the 25% rate bracket (who currently pay no capital gains or dividends taxes) would have seen their rate climb to 10%, while those above the 25% rate bracket would have seen the tax rise to 20%. 
 
AMT.   The AMT exemption amounts for 2010 were increased to $47,450 for individuals and $72,450 for joint filers.  For 2011, those figures were increased to $48,450 for individuals and $74,450 for joint filers.  The proposal is effective for taxable years after December 31, 2009. 
 
Other Provisions.   The $858 billion tax package contains dozens of additional provisions that range from education incentives, to unemployment insurance benefit extensions, to business expensing and tax provisions. One notable retirement planning provision is the extension of the charitable IRA rollover through 2011 (The bill extends the provision that permits tax-free distributions to charity from an IRA of up to $100,000 per taxpayer, per taxable year).  On the business tax front, a few notable provisions include an extension of bonus depreciation (the bill provides for recovery of investments in new business equipment through 2012), a temporary employee payroll tax cut (the bill provides a payroll tax holiday of 2% during 2011) and an extension of the research and development tax credit (through 2011).
 
Please feel free to call on us to provide information you, your clients, and their trustees need to know regarding this issue.
 
HORAN is a member of AALU: The Association for Advanced Life Underwriting, who provided information for this update.

 

Regards,

Terence L. Horan, CLU,ChFC

President & CEO

www.horanassoc.com  

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Cincinnati, OH 45236
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