Calling it “how we’re going to spark demand, spur hiring and strengthen our economy,” President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (Tax Relief Act) on December 17, 2010.
The new law includes temporary provisions to extend a broad range of currently expiring or expired tax rates and benefits, as well as changes to the expired-for-2010-only federal estate tax.
There are no revenue offsets as Congress circumvented PAYGO budgeting rules by designating each provision of the Act as an “emergency requirement.”
Major tax provisions of the Act are outlined below.
Because a number of the income tax provisions are retroactive and may reduce your federal tax liability for 2010, contact your tax advisor at Bader Martin to discuss the potential impact on your final estimated tax payment.
You should also consider the implications of the changes to estate and gift tax rules on your estate and philanthropic giving plans.
Provisions for Individuals: Income Taxes
Extends the so-called Bush-era tax cuts (otherwise set to expire after 2010) for two years, through 2012, including the reduced income tax rates and the reduced rates on capital gains and dividends.
Retroactively reinstates a number of tax credits and benefits that expired after 2009 and extends them through December 31, 2011, including the following:
— Optional itemized deduction for state and local general sales taxes as an alternative to the itemized deduction for state and local income taxes
— $250 deduction for certain expenses incurred by elementary and secondary school teachers
— Nonitemized deduction for qualified tuition and related expenses
— Increased monthly exclusion for employer-provided transit and vanpool benefits
— Tax-free distributions of up to $100,000 per year from IRA accounts to charity, for seniors age 70½ and older. There is also an option to treat a January 2011 transfer as if it was made in 2010
Extends a number of currently expiring tax breaks through 2011 or 2012, including the following:
— Elimination of the phase-out for itemized deductions and personal exemptions (extended through 2012)
— Marriage penalty relief (extended through 2011)
— Tax credit for energy-efficient improvements to existing homes (extended through 2011)
— American Opportunity Credit (extended through 2012)
— Coverdell Education Savings Accounts (extended through 2012)
— Adoption credit and adoption assistance programs (extended through 2012)
— Nonitemized student loan interest deduction (extended through 2012)
— $1,000 Child Tax Credit (extended through 2012)
— Exclusion of gain on certain small business stock (extended through 2011)
— Deductibility of mortgage insurance premiums (extended through 2011)
Provides for a two-year (2010 and 2011) patch on the alternative minimum tax (AMT). 2010 AMT exemption amounts are $47,450 for single filers and $72,450 for married couples filing jointly. 2011 exemption amounts are $48,450 and $74,450, respectively.
Extends the option to use nonrefundable personal credits to offset AMT through 2011.
Provisions for Individuals: Payroll Taxes
Reduces Social Security payroll taxes for one year. For employees, the tax decreases from 6.2 percent to 4.2 percent. For the self-employed, the tax decreases from 12.4 percent to 10.4 percent.
The amount of the deduction for ½ of self-employment taxes for self-employed persons is not reduced by the temporary reduction in Social Security taxes.
Provisions for Individuals: Estate and Gift Taxes
Lowers the federal estate and generation-skipping transfer taxes for 2011 and 2012 by increasing the exemption amount from $1 million to an indexed $5 million per individual ($10 million per couple), and reducing the top rate from 55 percent to 35 percent. The new exemptions and rates are retroactive to decedents who died after 2009, but are optional for decedents who died in 2010 as their estates may opt out in favor of applying modified carryover basis rules.
Lifetime Gift exemption amount increases to $5 million for 2011 and 2012, with 35 percent tax rate for gifts.
Executors can transfer unused estate and gift tax exemption amounts to a surviving spouse for decedents dying after December 31, 2010.
Provisions for Businesses
Extends 50 percent bonus first-year depreciation for property placed in service after December 31, 2011 and before January 1, 2013
Provides for a 100 percent first-year write-off of the cost of property otherwise eligible for bonus depreciation, if placed in service after September 8, 2010 and before January 1, 2012.
Extends optional election to claim a refundable AMT credit instead of bonus depreciation for property placed in service during 2011 and 2012.
Retroactively reinstates a number of tax credits and benefits that expired after 2009 and extends them through December 31, 2011, including the following:
— Research credit
— New markets credit
— Liberalized rule for charitable contributions from S corporations
Extends a number of currently expiring energy-related tax benefits through 2011, including the production tax credit for biodiesel and biodiesel created from biomass, the manufacturer’s credit for energy-efficient residential homes, the small agri-biodiesel producer credit and the investment tax credit for alternative vehicle refueling property.
Extends a number of expired and expiring tax breaks, including the following:
15-year recovery period for qualified leasehold improvements and restaurant and retail property, extended through 2011
Section 179 small business expensing amount increases to $125,000 for tax years beginning in 2012 with a phase-out amount of $500,000. After 2012, the expensing amount decreases to $25,000 with a phase-out amount of $200,000.
Call or email your Bader Martin tax advisor if you’d like to learn more about the new Tax Relief Act or discuss how it applies to your own situation.
