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Tax Relief, Unemployment Insurance Reauthorization & Job Creation Act of 2010

Congress finally passed the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” and President Obama has promised to sign it. This bill is based on the framework agreed to earlier this month by President Obama and GOP leaders.

Many people cannot understand why businesses are reluctant to hire and expand their business activities. While there are many reasons, perhaps the biggest reason is that there is much uncertainty about the future. The bill gives taxpayers some certainty in tax planning for at least the next two years. But since most of the provisions of this bill expire after two years, the November 2012 elections will be very interesting!

Here are the most significant features:

  • The favorable capital gains/dividend tax rates stay in place for two years
  • A one-year payroll tax cut for employees
  • 100% bonus depreciation for 2011 and 50% bonus depreciation for 2012
  • An AMT “patch”
  • Top federal estate and gift tax rate of 35 percent with a $5 million exclusion

Individual Tax Rates

The tax rate brackets of 10, 15, 25, 28, 33, and 35 percent remain intact and thus, the across the board rate reductions from 2003 remain.

Qualified capital gains and dividends for 2010 – 2012 will be taxed at a maximum rate of 15% (zero percent for taxpayers in the 10 and 15 percent income tax brackets).

Individual Taxes

The statutory overall limitation on itemized deductions that reduces the total amount of a higher-income individual’s otherwise allowable deductions is repealed through 2012.

The personal exemption phase-out is repealed for 2010 – 2012.

Marriage Penalty relief is extended through 2012.

The bill extends the $1,000 child tax credit through 2012. Without the extension, the child credit would revert to $500 per qualifying child. The child credit continues to be phased out for taxpayers as their income rises above $110,000 for joint filers, $75,000 for others. The qualifying child must be under 17 at the close of the year and satisfy relationship, residency, support, citizenship and dependent tests.

Earned Income Credit for low income taxpayers is extended through 2012.

Important charitable incentives were also extended. In addition to extending tax-free distributions from IRAs for charitable purposes and special rules for contributions of capital gain real property for conservation purposes, the bill also extends the following through 2011:

Extended credits & benefits

  • Adoption Credit
  • Dependent Care Credit
  • Employer-Provided Child Care
  • American Opportunity Tax Education Credit
  • Educational Assistance Exclusion
  • Student Loan Interest Deduction
  • Coverdell Education Savings Accounts
  • Scholarships under the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program

Other individual tax benefits

  • State and local sales tax deduction alternative
  • Higher education tuition deduction
  • Teacher’s classroom expense deduction
  • Charitable contribution of IRA proceeds
  • Charitable contribution of appreciated property for conservation purpose

Alternative Minimum Tax (AMT)

The bill provides a 2010 and 2011 AMT “patch” intended to prevent the AMT from encroaching on middle income taxpayers by providing higher exemption amounts. Without this patch, which had expired at the end of 2009, an estimated 21 million additional households would be subject to its reach. Additionally, nonrefundable personal credits are allowed to reduce an individual’s regular tax or AMT.

Payroll Tax Cut

The bill reduces the employee-share of Social Security tax from 6.2% to 4.2% for wages earned in calendar year 2011 up to $106,800 – a maximum savings of $2,136. The employer’s share of the tax remains at 6.2%. The Medicare tax rates and rules remain unchanged. Similarly, the Social Security portion of the self-employment tax drops from 12.4% to 10.4%.

Business Incentives

The bill boosts 50% bonus depreciation to 100% for qualified investments made on or after September 9, 2010 and on or before December 31, 2011. After that, bonus depreciation continues at the 50% rate until 12/31/12. Unlike the Section 179 expensing option, it is not limited for use by only smaller businesses or capped at a certain dollar level.

The bill allows taxpayers to monetize accumulated AMT credits in lieu of taking bonus depreciation. This treatment would apply for tax years 2011 and 2012.

The Section 179 asset write-off is set at a $125,000 limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) for tax years beginning in 2012.

The Research tax credit is extended, retroactively, for two years, through December 31, 2011.

Tax favored Transit Benefits are extended through the end of 2011. Affected benefits are employer-provided transit and vanpool benefits and the exclusion for employer-provided parking benefits.

The Work Opportunity Tax Credit (WOTC), intended to encourage employers to hire individuals from targeted groups, extends the WOTC through December 31, 2011 and is effective for employees hired after the date of enactment.

Business Tax Benefits

The bill extends through 2011 a number of business tax extenders that had expired at the end of 2009. These include:

  • New Markets tax credit; railroad track maintenance credit
  • 15-year recovery period for qualified leasehold improvements
  • restaurant building and improvements, and retail improvements
  • seven year motor sports entertainment costs recovery
  • film and television production costs
  • Brownfields remediation
  • five-year write off of farm machinery/ equipment
  • tax incentives for empowerment zones
  • tax incentives for investment in the District of Columbia Renewal community investments

Business energy incentives extended by the bill are: Credits for biodiesel and renewable diesel fuel; credit for refined coal facilities; new energy efficient home credit; excise tax credits and outlay payments for alternative fuel and alternative fuel mixtures; percentage depletion for oil and gas from marginal wells; tax credits and outlay payments for ethanol and tariff on imported ethanol; energy efficient appliance credit; and others.

The non-business energy credit is designed to reward individuals who make energy efficiency improvements to their residences with a tax benefit. The credit amount is 30% of the sum of expenditures for qualified energy efficiency improvements and property, such as furnaces, water heaters and other items. The bill extends the credit through 2011.

Federal Estate & Gift Taxes

Prior tax law changes gradually reduced and then abolished the federal estate tax for decedents dying in 2010. In the past, the estate tax had a maximum tax rate of 55% and $1 million tax free exclusion. The new bill imposes a maximum estate tax rate of 35% and a tax free amount of $5 million ($10 million for married couples) for decedents dying on or after January 1, 2011 and on or before December 31, 2012. Early in the negotiations for this tax bill, a 45% and $3.5 million exclusion had been discussed.

Stepped-Up Basis

The bill revives the traditional stepped-up basis regime for all assets included in the gross estate for decedents dying on or after January 1, 2011 and on or before December 31, 2012.

Portability

The bill provides for “portability.” Generally, portability would allow a surviving spouse to elect to take advantage of the unused portion of the estate tax exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount.

Gift Taxes

The bill reunifies the gift and estate taxes. Even though the gift tax has been largely unchanged in recent years, for gifts made after December 31, 2009, the gift tax is computed using a rate schedule having a top tax rate of 35% and a maximum applicable exclusion amount of $1 million. The bill provides for a top tax rate of 35 percent and a $5 million exclusion through December 31, 2012.

Generation Skipping Tax (GST)

The bill provides for a zero percent GST rate for 2010 and a $5 million exemption. The bill revives the GST tax for 2011 and 2012 at the maximum estate tax rates and exclusion.

John Chilton, CPA-ABV, CVA

Partner

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