|
"Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010" - A Law Which Extends the Bush-Era Tax Cuts, Provides for an Estate Tax Compromise and Grants Payroll Tax Relief
On December 17, 2010, President Obama signed into law the "Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010" (the "Act"). This legislation is a bipartisan compromise based in large part on a framework President Obama reached with Senate Republican leaders in early December, 2010.
Prior to its enactment, this new law was fraught with controversy. Many House Democrats, who were excluded when the Act was negotiated, have critized the law as being overly generous to the wealthy, especially at a time when the national debt is out of control. Specifically, House Democrats opposed extending the Bush-era income tax cuts for the rich as well as increasing the amount a person can leave at death without incurring an estate tax.
On the other hand, many Republicans, were against extending unemployment and other spending benefits given the federal deficit.
Even President Obama, who spearheaded the compromise, has stated publicly that there are many items in the Act which he does not favor.
Although many polititans and the public at large may take issue with some provisions in the Act, one thing is clear - the Act will provide tax relief for most individuals and businesses and will create many tax planning opportunities for years to come.
The purpose of this issue of e-Counsel is not to debate the pros and cons of the Act - we will leave that to the pundits. Rather, the goal of this newsletter is to provide an executive summary and overview of the new law and how it may effect you.
As with any piece of new legislation, the devil is in the details. Accordingly, this newsletter is not intended to give tax or other advice regarding any person's particular situation. If you have any questions regarding the Act or how it may apply to you, please do not hesitate to contact us.
How the Act Applies to Individuals
The Act provides for tax relief and presents significant planning opportunities for individual taxpayers.
1. Individual Tax Rates. The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%,28%,31%, 36%, and 39.6%). These rates will stay in place for two years, through December 31, 2012. The income tax rates used by estates and nongrantor trusts (15%, 25%, 28%, 33% and 35%) has also been extended for two years. Before the Act was passed, the tax rates were scheduled to increase for the 2011 tax year. Because of this, many taxpayers were considering accelerating income into the 2010 tax year to take advantage of the lower rates. Now that we have some certainty in the tax law (for two years), it may make more sense to defer recognition of income, assuming your rate would be the same or lower in 2011. 2. Capital Gain and Dividends. Qualified capital gains and dividends will continue to be taxed at a maximum rate of 15% (or 0% for taxpayers in the 10% and 15% income tax brackets) for two years, through December 31, 2012. If the Act had not been passed, the maximum rate on capital gain and dividends was scheduled to increase in 2011. For example, but for the Act, the capital gain rate was scheduled to increase to 20%. Because of this, many taxpayers were considering selling investments in 2010 to generate a 2010 capital gain thereby locking in the 15% rate and saving the 5% rate increase. Now that the Act has been passed, selling capital assets at a gain before the end of 2010 should be based more on the underlying investment and the taxpayer's investment philosophy, as opposed to pure tax considerations. Selling capital assets to generate losses still makes tax sense. 3. Itemized Deduction Limitation. Since 1991, a taxpayer's itemized deductions were reduced if the taxpayer's adjusted gross income was above a certain amount. This reduction in itemized deductions for higher income taxpayers was repealed for 2010. The Act continues this repeal for two years, through December 31, 2012. 4. Personal Exemption Phaseout. Personal exemptions allow a certain amount per person to be exempt from tax. Before 2010, taxpayers with incomes over certain amounts were subject to a phaseout of their personal exemptions. The personal exemption phaseout was repealed for the 2010 tax year. The Act continues this repeal for two years, through December 31, 2012. 5. Alternative Minimum Tax Relief. Under the Act, the AMT exemption amounts for 2010 will be as follows: - Married individuals filing jointly and surviving spouses: $72,450, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $439,800);
- Unmarried individuals: $47,450, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $302,300); and
- Married individuals filing separately: $36,225, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $219,900).
The AMT exemption amounts for 2011 will be as follows: - Married individuals filing jointly and surviving spouses: $74,450, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $447,800);
- Unmarried individuals: $47,450, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $302,300); and
- Married individuals filing separately: $36,225, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $219,900).
6. Marriage Penalty Relief. The Bush-era tax cuts increased the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return. This tax provision was added to provide relief from the so-called marriage penalty. The Act extends this marriage penalty relief for two years, through December 31, 2012. 7. Child Tax Credit. The Act extends the $1,000 child tax credit for two years, through December 31, 2012. The child credit continues to be phased out for taxpayers with adjusted gross income starting at $110,000 for joint filers ($75,000 for others). The qualifying child must be under age 17 at the close of the year and satisfy relationship, residency, support, citizenship and dependent tests just as in the past. 8. Earned Income Credit. The Bush-era tax cuts and subsequent legislation increased the beginning and ending points of the earned income tax credit ("EITC") and made other favorable changes to the credit for taxpayers. The Act extends the EITC enhancements for two years, through December 31, 2012. 9. Adoption Credit. Taxpayers who incur qualified adoption expenses may be eligible for an adoption credit. The Bush-era tax cuts and subsequent legislation enhanced the adoption credit. The Act extends these enhancements for two years, through December 31, 2012. 10. Dependent Care Credit. Taxpayers who incur expenses to care for a child or an incapacitated dependent or spouse to allow the taxpayer to work may be able to claim a dependent care credit ("DCC"). Among other things, the Bush-era tax cuts increased the credit and the amount of eligible expense for the credit. The Act extends the DCC enhancements for two years, through December 31, 2012. 11. American Opportunity Tax Credit. In 2009, the tax law was changed to enhance and rename the Hope education credit as the American Opportunity Tax Credit ("AOTC"). The Act extends the AOTC for two years, through Decemebr 31, 2012. 12. Coverdell Education Savings Accounts. The Act extends the maximum contribution amount of $2,000 that can be made to a Coverdell Education Savings Account for two years, through December 31, 2012. 13. Individual Tax Extenders. The Act extends (through 2011) a number of individual tax incentives that had expired at the end of 2009. These individual tax extenders include: - The election to take an itemized deduction for state and local general sales taxes in lieu of the deduction permitted for state and local income taxes;
- The above the line deduction for qualified tuition and related expenses;
- The provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an IRA of up to $100,000 per taxpayer per tax year;
- The $250 deduction for certain expenses of elementary and secondary school teachers.
Estate and Gift Tax Relief
The Act makes significant changes to the federal estate, gift tax and generation-skipping transfer tax which has been in a state of disarray for some time now. To appreciate what the Act does, it is important to understand prior law.
In 2001, an individual was allowed to exempt or leave up to $675,000 at death without incurring an estate tax. Every taxpayer was entitled to this exemption. This meant that a husband and wife could together pass up to $1,350,000 ($675,000 x 2) without paying an estate tax if they properly structured and planned their estate. Proper structuring and planning usually meant dividing up assets so that each spouse had at least the exemption amount of $675,000 in his or her name so that no matter who died first each spouse's exemption could be fully utilized.
From 2001 forward, the exemption amount gradually increased. It went up to $1,000,000 per taxpayer in 2002, and then increased to $1,500,000 in 2004. In 2006, the exemption jumped to $2,000,000. In 2009, the exemption amount reached a high of $3,500,000 per taxpayer. This meant that a husband and wife had the ability to exempt up to $7,000,000 worth of assets without paying an estate tax.
The beneficiaries who received assets at a deceased's death took those assets with a basis equal to the assets fair market value on the date of death. This was called a "step-up" in basis and meant that assets sold in close proximity of death could be sold at little or no gain.
The rules changed in 2010 when the estate tax was repealed for one year. Under the 2010 repeal, a person's entire estate, now matter what his or her net worth, could be passed on without incurring an estate tax. Although there was no estate tax, assets that beneficiaries receive in 2010 would not get the preferable basis step-up to fair market value. Instead, the deceased's basis in his or her assets would carryover to the beneficiaries subject to some special rules that allowed an executor to increase the basis of estate property up to $1,300,000 for any beneficiary and $3,000,000 for assets passing to a surviving spouse.
Without the Act, the estate tax law was scheduled to be reinstated in 2011 on much less favorable terms than in 2009. The exemption amount was set to be only $1,000,000 (much less then the $3,500,000 level in 2009). In addition, the highest estate tax rate was scheduled to be 55% (much more then the 45% rate in 2009). Now that was some history. So what does the Act do?
The Act imposes an estate tax for 2011, but also provides a generous exemption amount and tax rate. In 2011, an individual can exempt or leave as much as $5,000,000 without incurring an estate tax. This exemption is $1,500,000 higher then it was in 2009. Under the Act, a husband and wife would be able to leave up to $10,000,000 without incurring an estate tax.
In addition, the highest estate tax rate is 35% under the Act. This rate is 10% lower than the 45% rate that existed in 2009 and 20% lower then the rate which was scheduled for 2011 if the estate tax was reinstated absent the Act's passage.
The Act also makes a number of additional changes to the estate, gift and generation-skipping transfer tax laws, including:
- Portability. The Act provides for portability between spouses of the $5,000,000 exemption. Under these new portability rules, a surviving spouse can elect to take advantage of the unused portion of a deceased spouse's exemption. From a planning perspective, this means it may not be as important to even up assets between spouses during life. The portability provisions under the Act are effective for two years, beginning in 2011 and ending December 31, 2012.
- Reunification of Estate and Gift Tax Exemption. The Act reunifies the exemption for estate and gift taxes at the $5,000,000 exemption. This means that if a person wants to, he or she can use up to $5,000,000 of the exemption during life without incurring a gift tax. If this is done, the exemption would not be availiable for use at death since it was already used during life. Higher net worth individuals may want to consider using their exemption during life. The benefit of lifetime usage of the exemption is that future appreciation on gifted assets could be removed from an estate for estate tax purposes.
- Generation-Skipping Transfer Tax. The Act provides a $5,000,000 generation-skipping transfer tax exemption for 2010. For 2011 and 2012, the generation-skipping transfer tax rate is set at 35%.
The Act also gives an option for taxpayers who died in 2010. The new law gives 2010 estates the choice to elect to apply (1) the estate tax based on the new 35% top rate and $5,000,000 exemption with a stepped-up basis, or (2) no estate tax and the modified carryover basis rules.
Payroll Tax Relief
Under current law, employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4% Social Security self employment taxes on all their self employment income up to the same threshold. The Act gives a 2% payroll/self employment tax holiday for employees and the self employed. As a result, employees will pay only a 4.2% Social Security tax on wages and self employment individuals will pay only a 10.4% Social Security tax.
How the Act Applies to Business
1. 100% Bonus Depreciation. The Act increases the 50% bonus depreciation to 100% for qualified investments made after September 8, 2010 and before January 1, 2012. The Act also makes first year 50% bonus depreciation available for qualified property placed in service after December 31, 2011 and before January 1, 2013. 2. Section 179 Expensing. For 2012, the Act sets the maximum expensing amount under Section 179 at $125,000 and an investment-based phase-out amount at $500,000. For 2010 and 2011, the expensing amount is $500,000 and the investment limit is $2,000,000.
3. Research Tax Credit. The Act renews the Research Tax Credit for two years, through Decemebr 31, 2011.
4. Work Opportunity Tax Credit. With some modifications, the Act extends the Work Opportunity Tax Credit for individuals who begin employment after August 31, 2011 and before January 1, 2012. Conclusion
The Act will reduce or present planning opportunities which can reduce a taxpayer's tax liability. If you have any questions regarding how the Act applies to your particular situation, please do not hesitate to contact us.
CIRCULAR 230 DISCLOSUREUnder U.S. Treasury Department guidelines, we are required to inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or by any party to market or promote any transaction or matter addressed herein without the express and written consent of the Richard C. Petrofsky Law Office and Helfrey, Neiers & Jones, P.C., (2) the Richard C. Petrofsky Law Office and Helfrey, Neiers & Jones, P.C. imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (3) any fees otherwise payable to the Richard C. Petrofsky Law Office or Helfrey, Neiers & Jones, P.C. in connection with this written tax advice are not refundable or contingent on your realization of federal tax benefits from the advice contained herein. |
