New Tax Law Looks Likely: What's the Deal on Rates and Estates?

It looks increasingly likely that the tax bill agreed to by President Obama and the Republican leaders will pass.  Love it or hate it, at least there will be a temporary resolution of the uncertainty which has plagued the system for the last couple of years.  This is not the law yet, but here's what to expect on income tax rates and the estate tax:

The 2010 Tax Relief Act postpones the 2001 Tax Act sunset rule for two years. That is, under the 2010 Tax Relief Act, the income tax provisions of the 2001 Tax Act, other than those made permanent or extended by subsequent legislation, will sunset and will not apply to tax or limitation years beginning after 2012 (instead of 2010). Thus, the rules discussed below (among others) will remain in place through 2012.

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%).  It's not exactly a tax "cut" but prevents an otherwise scheduled tax increase.

Capital Gains and Dividends.

The bill keeps for two years the 2010 capital gain and dividend rates. Thus, through Dec. 31, 2012, long-term capital gain will continue to be taxed at a maximum rate of 15%. Also until 2013, qualified dividends paid to individuals will be taxed at the same rates as long-term capital gains (instead of being taxed at the same rates that apply to ordinary income).

Estate Tax Relief.

Among other changes, the 2010 Tax Relief Act:

·         Lowers estate taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million (as indexed after 2011) and reducing the top rate from 55% to 35%.

·         Allows 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.

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

This is sort of an increase because the estate tax rate in 2010 is zero.  It's also a decrease because it is more favorable than what was scheduled to take effect.

Conclusion.