Federal Legislation passed during 2001 created much tax uncertainty since various tax benefits contained in it were scheduled to expire for years after 2010. Due to Congressional inaction, these tax uncertainties have festered for a considerable period of time. However in very rapid fashion, starting with a proposed compromise on December 6, 2011, the Tax Relief, Unemployment Reauthorization & Jobs Creation Act of 2010, (the Act) after prior approval by the Senate was agreed to by the House during the wee hours of this morning. The legislation will be signed shortly by the president.
The mass media has continually reported on various provisions of the Act. However, a review of it indicates that there are numerous other little known tax provisions that are significant. Below, we have set forth a summary of provisions that we think will be of importance to you.
1. Temporary Extension of Tax Relief
· The income tax rates that were in effect for calendar year 2009 have been extended for two additional years through 2012. Thus the highest individual tax bracket will continue at 35%.
· Phase outs of personal exemptions and various itemized deductions have been postponed for two additional years.
· The maximum tax rates for long term capital gains and qualified dividends, currently 15%, have been extended for an additional two years through 2012.
· Current provisions relating to the child tax credit and to the dependent care credit have been extended for an additional two years through 2012.
· Various educational incentives have been extended for an additional two years through 2012. They include Coverdell accounts, student loan interest deductions and the American Opportunity Tax Credit.
2. Individual Alternative Minimum Tax Relief
· Temporary patches to the Alternative Minimum Tax which involve increasing exemption amounts have been a constant for the past several years. The Act continues increased exemptions for calendar years 2010 and 2011.
· The ability to use nonrefundable personal credits to offset the Alternative Minimum Tax has been extended.
3. Temporary Estate Tax Relief
· As a result of the 2001 tax legislation, estate and generation skipping transfer tax rates declined through 2009 while exemptions increased. For one year only, 2010, these taxes were repealed. Effective January 1, 2011 exemptions and rates were scheduled to revert back to 2001 levels. The Act has reinstated the estate and generation skipping transfer taxes retroactive to January 1, 2010 albeit with $5,000,000 per person exemptions and a 35% tax rate. In addition, the modified carryover basis rules that were in effect for individuals passing away during 2010 have been repealed. To add to the complexity, the executor of an estate may, under the Act, elect to apply either the no tax regime with a modified basis step up, or the new exemptions and tax rates ($5,000,000 and 35%) with a full basis step up to market value as of the date of death (or alternate valuation date).
· To greatly simplify, a married couple now has $10,000,000 of estate and generation skipping transfer tax exemptions. In contrast to prior tax law, the executor of a deceased spouse's estate can transfer any unused exemption to the surviving spouse.
· Effective for gifts made after December 31, 2010, the gift and estate taxes will be reunified. This means that the lifetime gift tax exemption will increase from $1,000,000 to $5,000,000 for each individual.
4. Temporary Extension of Investment Incentives
· Bonus depreciation. With respect to the cost of most capital expenditures placed in service after September 8, 2010 and through December 31, 2011, the Act provides for 100% expensing. For 2012 capital expenditures the Act provides for 50% bonus depreciation.
· First year Section 179 depreciation. For calendar years 2010 and 2011 the maximum annual amount of capital expenditures that can be deducted currently (subject to various phase out rules) will remain at $500,000. This deduction begins to phase out at $2,000,000. For calendar years after 2011 these amounts drop to $125,000 and $500,000 respectively.
5. Temporary Extension of Employment Insurance.
· Federal unemployment insurance benefits are reauthorized for one year.
6. Temporary Employee Payroll Tax Cut.
· For calendar year 2011 employees will pay social security taxes on all wages earned up to $106,800 at a rate of 4.2% instead of 6.2%. This provision does not affect the employer's share of social security taxes.
7. Temporary Extension of Certain Expiring Provisions.
· Energy. Many energy related tax provisions have been expended through 2011. These include subsidies for ethanol and credits for energy efficient appliances and energy efficient existing homes.
· Individual tax relief. A number of tax deductions have been extended through 2011. They include the above the line deductions for expenses of teachers, deductions for state and local sales taxes and deductions for qualified education expenses. In addition, the Act extends a provision that permits a tax free distribution to a charity from an individual retirement account of up to $100,000 per taxpayer per year. Due to the late enactment of the Act, an individual may elect to treat charitable transfers from an IRA made during January 2011 as if they were made during 2010.
· Business tax relief. The Research and Development Credit has been retroactively reinstated for two years through 2011 as has the New Markets Tax Credit. Provisions allowing businesses to deduct contributions of food and book inventory and computers have also been extended. The Work Opportunity Credit which allows businesses to claim a tax credit for wages paid to new hires from a targeted group has also been extended through 2011.
What is not included? Though extensive, the tax legislation does not include many provisions which were subject to extended discussions during 2010. They include relief for business from enhanced Form 1099 reporting and a change to the treatment of carried interests in a partnership. Limitations on the use of GRATS, use of intrafamily valuation adjustments, vital to many estate planning techniques, and the concept of Crummey powers all have not been addressed.
As you can see the scope of this legislation is quite voluminous. Space considerations preclude a discussion of other provisions contained in the Act. Many of provisions that we did discuss require significant thought and perhaps open the door to effective tax planning. We urge you to contact your tax advisor to set up an appointment to meet in order to discuss those provisions that are germane to your tax situation.
