On December 16, the House of Representatives voted 277-148 to approve the Senate-passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act). President Obama signed the measure into law the afternoon of December 17, 2010.

Now in its final form, the law contains several provisions in addition to the two-year extension of the current income tax brackets. Of note are substantial changes to the estate tax provisions.

I.          Estate Tax Changes

The law will set the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent (35%) for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed starting 2012. This reunifies the gift tax with the estate tax, which were decoupled in 2001.  

The new law also provides the generation-skipping tax ("GST") exemption for decedents dying or gifts made after Dec. 31, 2009, is equal to the $5 million exclusion amount. As a result, up to $5 million in GST tax exemption may be allocated to a trust created or funded during 2010. The GST tax rate for transfers made in 2010 is zero percent (0%), even though the GST tax is applicable in 2010. The GST tax rate for transfers made in 2011 and 2012 will be 35%.

Additionally, the new law will allow the estates of decedents dying in 2010 to choose between:

            (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis; or

            (2) no estate tax and modified carryover basis.

For estates of decedents dying after Dec. 31, 2010, the new law allows the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse.

The new law also provides that for decedents dying after Dec. 31, 2009, and before the enactment date, the due date for filing an estate tax return, making any payment of estate tax, and disclaiming an interest in property passing by reason of death is not to be earlier than the date that's nine months after the enactment date.

II.         AMT Patch

The law contains a two-year patch for the "alternative minimum tax" retroactive to January 2010. The AMT is an alternate tax regime originally implemented ensure people with high incomes pay taxes.  However, the AMT is not indexed for inflation, and as a result has come to ensnare many middle-class taxpayers. This patch will spare 21 million taxpayers this year.

III.        Temporary Extension of Unemployment Insurance

The law provides a one-year reauthorization of federal UI benefits. The proposal continues the Emergency Unemployment Compensation (EUC) benefits for one year. In addition, it continues 100% Federal Financing of Extended Benefits (EB) for one year, and makes changes to the EB look-back enabling states to continue to trigger on EB.
 

IV.        Temporary Employee Payroll Tax Cut

For 2011 only, the law will reduce Social Security (FICA) taxes, by two percent (2%) of the employee's portion of the 6.2% tax, for a one-year rate of 4.2%. For those earning over $106,800, the savings could be as much as $2,136.
 

V.         Business Investment Incentives

The 2010 Tax Relief Act increases 50% bonus depreciation to 100% for qualified investments made after September 8, 2010 and before January 1, 2012. The 2010 Tax Relief Act also makes 50% bonus depreciation available for property placed in service after December 31, 2011 and before January 1, 2013.
 

VI.        Individual Income Taxes

As noted above, the law continues the current individual income tax rates through 2012. There are lesser-known provisions in the new law affecting individual taxpayers. Among them are:

            - A deduction of up to $250 for educators who spend their own money on classroom supplies. This is an above-the-line deduction, so teachers don't have to itemize to claim it.

            - A tax credit for taxpayers who make energy-efficient improvements to their homes.

            - The child tax credit will be extended for two years. This allows eligible families to reduce their federal tax bill by up to $1,000 for each qualifying child under age 17.

            - The American Opportunity Credit, which is designed to offset the cost of college. The credit, extended through 2012, provides a tax credit of up to $2,500 per college student per year. Taxpayers can claim the credit for up to 100% of the first $2,000 in qualified college costs and 25% of the next $2,000. To get the full credit, you'll need to spend at least $4,000 on qualified expenses. Married couples with modified adjusted gross income of up to $160,000 can claim the full credit.

            - A provision allowing student-loan borrowers to deduct up to $2,500 in interest on federal student loans will be extended through 2012. Absent the new law, the deduction would have still been available, but with lower limits for borrowers.

            - A provision allowing employees to exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance is continued through 2012.
 

DDK & Company LLP can help your company obtain the maximum advantage from these tax law changes.  Please do not hesitate to contact us for assistance.

Questions?  Please contact the  DDK TAX TEAM