Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010
Robert T. Bowsher
Lance J. Kinchen
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”). The Act temporarily extends tax cuts that were set to expire at the end of 2010 under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the Job and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”). The following is a brief summary of some of the Act’s main provisions.
Individual Income Tax Rates. One of the biggest benefits resulting from the new Act is that the individual income tax rates or brackets will remain unchanged through the end of 2012. Prior to the new Act, the 25%, 28%, 33% and 35% individual income tax brackets were set to expire at the end of 2010. Without the Act, the individual income tax brackets would have been 28%, 31%, 36% and 39.6% in 2011. The Act extends the 25%, 28%, 33% and 35% individual income tax brackets for an additional two (2) years, through 2012. The Act also maintains the 10% bracket for low income taxpayers for an additional two (2) years, through 2012.
Capital Gains and Dividends. The Act extends for those taxpayers in the 25% individual income tax bracket and above, the long-term capital gains and dividend tax rates at 15%. Without the new Act, the rates for long-term capital gains would have increased to a maximum of 20% and dividends would have been subject to the ordinary income tax rates. The new Act also retains the long-term capital gains and dividend rates for taxpayers below the 25% bracket at 0%.
Itemized Deduction Limitation. For the past several years, the amount of itemized deductions that a taxpayer may claim has been reduced to the extent that the taxpayer’s adjusted gross income is above a certain amount. The first year in which there were no limitations on itemized deduction in 2010. The Act extends the repeal of the itemized deduction limitation for an additional two (2) years, through 2012.
AMT Relief. The Act increases the AMT exemption amount for 2010 from $33,750 to $47,450 for non-married individuals and from $45,000 to $72,450 for married individuals filing jointly. The Act increases the AMT exemption amount for 2011 to $48,450 for non-married individuals and $74,450 for married individuals filing jointly.
Temporary Extension of Estate Tax Relief. After December 31, 2010, the Bush era estate tax reduction was scheduled to expire and return to the exemption amounts and the rates in effect in 2001. This result was apparently not acceptable to anyone and the resulting tax relief Act makes significant changes to the estate tax provisions of the Internal Revenue Code, which will now be in effect until January 1, 2013.
(a) The applicable credit amount, which is the amount an individual can pass free of estate tax to his heirs, which was scheduled to be $1.0 million in 2011 with a maximum tax rate of 55% was changed for decedents dying after December 31, 2009 to be $5.0 million with a maximum tax rate of 35%.
(b) After December 31, 2010, the gift tax exclusion amount for an individual’s lifetime gifts will be raised from $1.0 million to $5.0 million. Additionally, the applicable credit for estate tax purposes and the exclusion amount for gift tax purposes will again become a unified credit for taxable transfers both during an individual’s lifetime and also at death.
(c) The Act did away with, in general, the carryover basis for heirs of decedent’s dying in 2010, providing a return to a step up in basis to the fair market value of the decedent’s property at the date of death.
(d) For decedents dying in 2010, the executor of such estates may elect out of the new estate tax and stepped up basis provisions and have the old provisions apply. For estates having net assets in excess of $5.0 million, the executor may want to elect out of the new tax provisions to avoid paying estate taxes but then the assets of the estate will have a carryover basis to the heirs, not a stepped up basis. Under rules to be issued by the Treasury, the executors of such estates will have nine (9) months from enactment of the Act to elect out.
(e) The Act introduces a new benefit for married decedents dying after December 31, 2010. In situations where the first spouse to die does not use all of the deceased spouse’s applicable credit amount of $5.0 million, the unused portion is available for use by the surviving spouse as an addition to such surviving spouse’s own applicable exclusion amount of $5.0 million. For example, if the first spouse to die only has a taxable estate of $3.0 million, the surviving spouse may use the predeceased spouse’s carryover amount of $2.0 million with such surviving spouse’s own $5.0 million exclusion for taxable transfers of $7.0 million made during life or at death.
These provisions are only a temporary fix to the estate and gift tax issues and all of these provisions sunset after December 31, 2012, when the old law of 2001 once again is scheduled to come back into effect at an applicable credit amount of $1.0 million and a maximum tax rate of 55%.
Payroll Tax Cut. The Act reduces only the employee portion of the social security tax from 6.2% to 4.2% for 2011. Under current law, employees pay 6.2% in social security tax in all wages earned up to $106,800 (in 2011). Self-employed individuals pay 12.4% social security self-employment taxes on all of their self-employment income up to the same threshold. The Act provides that self-employed individuals will only pay 10.4% on self-employed income up to the threshold amount for 2011.
100% Bonus Depreciation. Businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Congress allowed businesses, beginning January 1, 2008 through December 31, 2009, to take an additional depreciation deduction allowance equal to 50% of the cost of the depreciable property placed in service in those years. Under the Small Business Jobs Act of 2010, this temporary increase in the depreciation deduction allowance was extended through December 31, 2010. The Act now extends and temporarily increases this bonus depreciation provision for investments in new business equipment. For qualified property acquired after September 8, 2010 and before January 1, 2012, and which is placed in service by the taxpayer before January 1, 2012 (before January 1, 2013 for certain longer-lived and transportation property), the Act provides for 100% bonus depreciation. For qualified property placed in service after December 31, 2011 and through December 31, 2012 (before January 1, 2013 for certain longer-lived and transportation property), the Act provides for 50% bonus depreciation.
Section 179 Deduction. Under current law, a taxpayer may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time. The 2003 tax cuts temporarily increased the maximum dollar amount that may be deducted from $25,000 to $100,000. The tax cuts also increased the phase-out amount from $200,000 to $400,000. In 2007, the tax cuts temporarily increased these thresholds to $125,000 and $500,000, respectively, indexed for inflation. These amounts have been further increased and extended several times on a temporary basis, including most recently as part of the Small Business Jobs Act which increased the thresholds to $500,000, with the $500,000 amount reduced by the amount by which the cost of the qualifying property placed into service in that year exceeds 2,000,000 for the taxable years beginning in 2010 and 2011. The Act extends the 2007 maximum amount for taxable years beginning in 2012, to $125,000 and phase-out thresholds to $500,000, respectively, indexed for inflation.
Gulf Opportunity Zone Extensions.
(a) The Act extends for two (2) years an additional depreciation deduction equal to 50% of the cost of new property investments made in the Gulf Opportunity Zone. The Act makes qualifying expenditures in 2011 eligible provided the property is placed in service by December 31, 2011.
(b) The Act extends for an additional two years the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone. The Gulf Opportunity Zone Act of 2005 increased the rehabilitation credit from 10% to 13% of qualified expenditures for any qualified rehabilitated building other than a certified historic structure, and from 20% to 26% of qualified expenditures for any certified historic structure located in the Gulf Opportunity Zone. The extension applies to qualified rehabilitation expenditures with respect to such buildings or structures incurred before January 1, 2012.
(c) The Gulf Opportunity Zone Act of 2005 provided an additional allocation of low-income housing tax credits to the Gulf Opportunity Zone in an amount equal to the product of $18.00 multiplied by the portion of the State population which is in the Gulf Opportunity Zone. The additional allocations were made in calendar years 2006, 2007 and 2008, and required that the properties be placed in service before January 1, 2011. The Act extends that placed-in-service deadline for one year to December 31, 2011.
(d) Under previous law, Gulf Opportunity Zone bonds were authorized to help rebuild areas devastated by Hurricane Katrina and must be issued by December 31, 2010. The Act provides one additional year to issue Gulf Opportunity Zone bonds, through December 31, 2011.
Conclusion. The Act contains numerous other provisions that may apply to your specific situation. We recommend that you consult your individual tax advisor to determine what provisions of the Act may affect your individual or business tax returns. Pursuant to IRS Circular 230 and IRS regulations, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication, including attachments, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.