Two Years of Certainty

CERTAINTY.

Last night, the House passed (by a vote of 277-148) the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  The President will sign the bill soon, finally giving the American taxpayer some certainty with respect to income and estate/gift taxes, at least for the next two years.

At its most sweeping, the bill extends the current tax rates, which were set to expire at the end of this year, for two more years, to 12/31/2012.  This preserves the 10% tax bracket, and the top tax bracket stays at 35%.  Further, the special 15% rate for long-term capital gains and qualified dividends is preserved, through 2012.  The alternative minimum tax (AMT) has been “patched” for 2 years (2010 and 2011) to keep the exemption in line with what it has recently been, in 2010 it will be $47,450 for single filers and $72,450 for joint filers.  That will keep many middle-class taxpayers from being subject to the tax.

There are several “extenders” included in this bill as well – miscellaneous provisions that were set to expire this year but have been extended for two years.  They include, but are not limited to:

• Increasing the standard deduction for married individuals to twice that of single filers,
• Preventing the phase-out of personal exemptions for higher-income taxpayers,
• Preventing the reduction of itemized deductions by 3% of AGI for higher-income taxpayers,
• Preserving the Coverdell Education Savings Accounts (ESAs) through 2012,
• Preserving the exclusion for employer-provided educational assistance,
• Preserving the student loan interest deduction on page 1 of the 1040,
• Preserving the American Opportunity Tax Credit for higher education costs,
• Increasing the Child Tax Credit to $1,000 per child,
• Preserving the credit for dependent care.

For employees and self-employed taxpayers, a nice holiday “gift” is the one-year reduction of Social Security tax from 6.2% to 4.2%.  This is for 2011 only, but effectively amounts to a 2% reduction in tax on your wages or self-employment income, up to the Social Security max of $106,800.  That is a gift valued at up to $2,136!

There are also a number of provisions that expired at the end of 2009, but have been reinstated for 2010 (retroactively) and extended into 2011 as well (but NOT 2012)—some highlights:

• The ability for taxpayers older than age 70 ½ to make tax-free distributions from their IRA to a charity and have it count as their required minimum distribution (for 2010 only, you can even make your distribution in January of 2011 and still have it count as 2010, due to the late passage of this benefit),
• The $250 above-the-line deduction for classroom expenses of teachers,
• The ability to deduct state and local sales taxes instead of state and local income taxes,
• The above-the-line deduction for tuition & fees,
• The increased limits & carry-forward period of appreciated real property contributed for conservation purposes,
• The increased amount of monthly exclusion for employer-provided transit & vanpool benefits (keeping them equal to employer-provided parking benefits of $230 per month),
• The ability to treat mortgage insurance premiums as mortgage interest for certain taxpayers.

The energy-efficient home improvement credit is also extended to 2011 (but is extended as it stood before the most recent tax law change, generally 10% of improvements, and dollar limits for certain items, like $50 for main air circulating fans, $150 for furnaces or hot water heaters, etc., and  $500 limit overall).  This credit is much more advantageous in 2010 but nonetheless it is extended to 2011 in a reduced fashion.

Finally, for individuals, the bill includes long-overdue guidance on gift and estate taxes.  In 2010, there was no estate tax or generation-skipping transfer (GST) tax.  If a taxpayer died in 2010, there was no step-up basis, though, either (though taxpayers could get a step-up on up to $1.3 million of assets).  The estate tax was scheduled to return in 2011, though at a higher rate. 

In this bill, there is some remedial guidance on 2010 and new guidance for 2011 and 2012. 

• Estate and GST taxes for 2011 and 2012 are at a 35% rate (from 55%) and the exemption is raised from $1 million to $5 million (which will now be indexed after 2011).
• Starting in 2011, the gift tax is reunited with the estate tax, sharing the $5 million exclusion and 35% rate.
• Starting in 2011, any unused exemption from a deceased taxpayer can be transferred to the taxpayer’s spouse, effectively setting the estate tax exemption at $10 million for married couples.
• For taxpayers who died in 2010, estates are given the choice of paying the estate tax (using 2011 rules) and getting a step-up in basis on all assets, or paying no estate tax and using modified carryover basis for the assets. 
• Looking back at 2010, though there was no GST tax (0% rate), the GST exemption is raised to the $5 million amount so that you can allocate GST exemption to a trust funded in 2010.
• The due date for an estate return and paying any estate tax for a taxpayer who died in 2010 is set at 9 months after the date this law is enacted.

Business Tax Breaks

We will issue more guidance on this next week, but businesses were included in this bill as well.  Some highlights:

• 100% bonus depreciation is available for assets placed in service after September 8, 2010 and before January 1, 2012.
• 50% bonus depreciation is available for assets placed in service after December 31, 2011 and before January 1, 2013.
• For 2012 and beyond, the section 179 limit is set at $125,000 (phasing out when purchases exceed $500,000).  In 2010 and 2011, section 179 was already at a $500,000/$2M limit.
• Several business tax breaks were extended through 2011 (that were expired at the end of 2009), including the research credit, 15-year depreciation period for qualified leasehold improvements & restaurant improvements, work opportunity tax credit, and many more.

Stay tuned as we have much more guidance to come.  Feel free to contact us if you have any questions.