Congress has approved and President Obama is expected to quickly sign the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act).
The 2010 Tax Relief Act extends for two years the Bush-era tax cuts, provides significant estate tax relief, and includes a two-year AMT “patch.” It also contains important new tax breaks for businesses and individuals, including 100% first-year writeoffs of qualifying property placed in service after September 8, 2010 and before January 1, 2012, and a payroll/self-employment tax cut of two percentage points for 2011 for employees and self-employed individuals, plus a host of extenders for businesses and individuals.
The new law gives taxpayers some certainty in tax planning for the next two years, especially concerning the individual income tax rates, capital gains/dividend rates, and the estate tax.
Below is a summary of what’s in the 2010 Tax Relief Act.
Tax rates. The 2010 Tax Relief Act extends all individual rates at 10%, 15%, 25%, 28%, 33% and 35% for two years, through December 31, 2012.
According to the Joint Committee on Taxation Explanation of the 2010 Tax Relief Act, the tax rate schedules for 2011, as adjusted for inflation, will be as follows:
|FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES, THE 2011 RATE BRACKETS WILL BE:|
|If taxable income is:||The tax will be:|
|Not over $17,000||10% of taxable income|
|Over $17,000 but not over $69,000||$1,700.00 plus 15% of the excess over $17,000|
|Over $69,000 but not over $139,350||$9,500.00 plus 25% of the excess over $69,000|
|Over $139,350 but not over $212,300||$27,087.50 plus 28% of the excess over $139,350|
|Over $212,300 but not over $379,150||$47,513.50 plus 33% of the excess over $212,300|
|Over $379,150||$102,574.00 plus 35% of the excess over $379,150|
|FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES), THE 2011 RATE BRACKETS WILL BE:|
|If taxable income is:||The tax will be:|
|10% of taxable income|
|Over $8,500 but not over $34,500||$850.00 plus 15% of the excess over $8,500|
|Over $34,500 but not over $83,600||$4,750.00 plus 25% of the excess over $34,500|
|Over $83,600 but not over $174,400||$17,025.00 plus 28% of the excess over $83,600|
|Over $174,400 but not over $379,150||$42,449.00 plus 33% of the excess over $174,400|
|Over $379,150||$110,016.50 plus 35% of the excess over $379,150|
|FOR HEADS OF HOUSEHOLDS, THE 2011 RATE BRACKETS WILL BE:|
|If taxable income is:||The tax will be:|
|Not over $12,150||10% of taxable income|
|Over $12,150 but not over $46,250||$1,215.00 plus 15% of the excess over $12,150|
|Over $46,250 but not over $119,400||$6,330.00 plus 25% of the excess over $46,250|
|Over $119,400 but not over $193,350||$24,617.50 plus 28% of the excess over $119,400|
|Over $193,350 but not over $379,150||$45,323.50 plus 33% of the excess over $193,350|
|Over $379,150||$106,637.50 plus 35% of the excess over $379,150|
|FOR MARRIEDS FILING SEPARATE RETURNS, THE 2011 RATE BRACKETS WILL BE:|
|If taxable income is:||The tax will be:|
|Not over $8,500||10% of taxable income|
|Over $8,500 but not over $34,500||$850.50 plus 15% of the excess over $8,500|
|Over $34,500 but not over $69,675||$4,750.00 plus 25% of the excess over $34,500|
|Over $69,675 but not over $106,150||$13,543.75 plus 28% of the excess over $69,675|
|Over $106,150 but not over $189,575||$23,756.75 plus 33% of the excess over $106,150|
|Over $189,575||$51,287.00 plus 35% of the excess over $189,575|
2010 Tax Reform Act defers for two years the sunset ruleof the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). Thus, through Dec. 31, 2012, long-term capital gain and qualified dividends (with the exception of 28% rate gain and unrecaptured section 1250 gain) will continue to be taxed at a maximum rate of 15%.
EGTRRA gradually reduced over a period of years and then abolished the federal estate tax for decedents dying in 2010. The pre-EGTRRA estate tax (with a maximum tax rate of 55 percent and a $1 million exclusion) was schedule to be revived after 2010. Additional EGTRRA changes affected the gift tax and the generation-skipping transfer (GST) tax.
The 2010 Tax Relief Act revives the estate tax for decedents dying after December 31, 2009, but at a significantly higher level than had been scheduled after 2010 under EGTRRA. The maximum estate tax rate is 35 percent with an exclusion amount of $5 million. This new estate tax regime; however, is itself temporary and is schedule to sunset on December 31, 2012.
EGTRRA phased out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, lowered the gift tax rate to 35% and increased the gift tax exemption to $1 million for 2010. Under the EGTRRA sunset rule, the estate tax was set to return in 2011, with the top estate and gift tax rate reverting to 55%. For 2010, under EGTRRRA, the basis rules for inherited property were to be similar to the gift tax rules but with many opportunities for heirs to get increases in basis. Under the EGTRRA sunset rule, the pre-EGTRRA step-up in basis rules were to return for 2011.
The Senate passed 2010 Tax Relief Act:
- Lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount (technically, the applicable exclusion amount) from $1 million to $5 million (as indexed and rounded to the nearest multiple of $10,000 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. In technical terms, the Act achieves this choice by making the estate tax and basis changes effective retroactively for estates of decedents dying after 2009 but allowing the opt-out choice for estates of decedents dying in 2010.
- For gifts made after December 31, 2010, reunifies the gift tax with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%.
- Provides that the GST tax exemption for decedents dying or gifts made after December 31, 2009, is equal to the applicable exclusion amount for estate tax purposes (e.g., $5 million for 2010). Therefore, up to $5 million in GST tax exemption may be allocated to a trust created or funded during 2010. Although the GST tax is applicable in 2010, the GST tax rate for transfers made during 2010 is 0%. The GST tax rate for transfers made in 2011 and 2012 will be 35%.
- For a decedent dying after December 31, 2009, and before the enactment date, provides that 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 is nine months after the enactment date.
- Effective for estates of decedents dying after December 31, 2010, allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse.
The 2010 Tax Relief Act boosts 50-percent bonus depreciation to 100-percent for qualified investments made after September 8, 2010 and before January 1, 2012. The 2010 Tax Relief Act also makes 50-percent bonus depreciation available for qualified property placed in service after December 31, 2011 and before January 1, 2013.
- 100% writeoff in the placed-in-service year of the cost of property eligible for bonus depreciation. This will apply for property acquired and placed in service after September 8, 2010, and before January 1, 2012;
- A 50% bonus first-year depreciation allowance under for property placed in service after December 31, 2011, and before January 1, 2013;
- Extension through December 31, 2012, of the election to accelerate the AMT credit instead of claiming additional first-year depreciation; and
- For tax years beginning after December 31, 2011, setting the maximum expensing amount at $125,000 and the investment-based phaseout amount at $500,000 (under current law, the expensing figures drop from $500,000/$2 million for 2010 and 2011 to $25,000/$200,000 after 2011). Also, off-the-shelf computer software will qualify for the expensing election if placed in service in a tax year beginning before 2013.
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 12.4% Social Security self-employment taxes on all their self-employment income up to the same threshold.
For 2011, the 2010 Tax Reform Act gives a two-percentage-point payroll/self-employment tax holiday for employees and self-employeds. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.
The following business tax breaks that expired at the end of 2009 will be retroactively reinstated and extended through 2011:
- the research credit;
- the Indian employment tax credit;
- the new markets tax credit;
- railroad track maintenance credit;
- mine rescue team training credit;
- employer wage credit for activated reservists;
- 15-year writeoff for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements;
- 7-year writeoff for motorsports entertainment facilities;
- accelerated depreciation for business property on an Indian reservation;
- enhanced charitable deductions for contributions of food inventory, for contributions of book inventories to public schools and for corporate contributions of computer equipment for educational purposes;
- election to expense mine safety equipment;
- special expensing rules for certain film and television products;
- expensing of environmental remediation costs;
- allowance of the Code Sec. 199 domestic production activities deduction for activities in Puerto Rico; and
- modification of tax treatment of certain payments to controlling exempt organizations;
- treatment of certain dividends of regulated investment companies (RICs);
- RIC qualified investment entity treatment under FIRPTA;
- exceptions for active financing income;
- look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules;
- basis adjustment to stock of S corporations making charitable contributions of property;
- empowerment zone tax incentives;
- tax incentives for investment in the District of Columbia;
- temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands; and
- American Samoa economic development credit.
The following business tax breaks are extended through 2011:
- the work opportunity tax credit; and
- qualified zone academy bonds.
All of the following tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011:
- the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers;
- the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes;
- increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes;
- 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 Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010);
- look-thru of certain RIC stock in determining gross estate of nonresidents; and
- disregard of refunds in the administration of federal or federally assisted benefit programs.
The following tax breaks for individuals that were set to expire at the end of 2010 will be extended through 2011:
- the increase in the monthly exclusion for employer-provided transit and vanpool benefits equal to that of the exclusion for employer-provided parking benefits (i.e., $230 per moth);
- treatment of mortgage insurance premiums as deductible qualified residence interest; and
- exclusion of 100% of gain on certain small business stock.
The list of energy-related provisions that will be extended through 2011 are:
- the $1.00 per gallon production tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon;
- the $1.00 per gallon production tax credit for diesel fuel created from biomass;
- the placed-in-service deadline for qualifying refined coal facilities;
- the credit for manufacturers of energy-efficient residential homes;
- the $0.50 per gallon alternative fuel tax credit (but the credit will not be extended for any liquid fuel derived from a pulp or paper manufacturing process);
- deferral of gain on qualified electric utilities’ sales or dispositions of electric transmission property;
- the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well;
- grants for specified energy property in lieu of tax credits;
- the income tax credit for alcohol used as fuel;
- the reduced credit for ethanol blenders;
- the excise tax credit for alcohol used as fuel;
- the payment for alcohol fuel mixture;
- additional duties on imported ethanol;
- the energy efficient appliance credits (in new amounts and with new requirements);
- the credit for energy-efficient improvements to existing homes, but reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act (standards for eligible property are updated to reflect improvements in energy efficiency));
- the 30% investment tax credit for alternative vehicle refueling property.