With just weeks to go before the end of the year, Congress has cleared tax relief legislation extending the Bush-era individual and capital gains and dividend tax cuts for all taxpayers for two years, as well as a 13-month extension of unemployment benefits.
CCH has issued a Special Tax Briefing on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, providing insight and analysis on the bill that Congress passed late Thursday night (see House Passes Extension of Bush Tax Cuts and Unemployment Benefits).
The Tax Relief Act also provides for an AMT “patch,” a one-year payroll tax cut, 100 percent bonus depreciation through 2011 and 50 percent bonus depreciation for 2012, a top federal estate tax rate of 35 percent with a $5 million exclusion, and more. The President is expected to sign the bill today.
“The Act brings a welcomed level of relief and some certainty for taxpayers for the next two years,” noted CCH senior federal tax analyst John W. Roth.
While the Act is expected to help pump money back into the economy, it comes at a cost of an estimated $857 billion, including:
• Individual Tax Cuts: $186 billion
• AMT Relief: $136 billion
• Payroll Tax Deduction: $111 billion
• Estate/Gift Tax Relief: $68 billion
• Capital Gains/ Dividend Cuts: $53 billion
• Bonus Depreciation/179 Expensing: $21 billion
• Other: $226 billion
• Total = $801 billion total cost of tax provisions; $857 billion total cost of law includes $56 billion for Unemployment Insurance Extension.
Here is an overview from CCH of what’s about to become the new law.
Individual Tax Rates
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the individual income tax rates were scheduled to revert from 10, 15, 25, 28, 33 and 35 percent to 15, 28, 31, 36 and 39.6 percent after December 31, 2010. The Act now extends the 10-percent rate and the other reduced individual income tax rates for two years, through December 31, 2012, for all taxpayers.
Combined with the payroll tax cut that’s also part of this Act, the extension of the individual rate cuts will give many people a significant increase in immediate dollars available to them in 2011 over what would have resulted without this bill. For example, an individual earning $50,000 in 2011 will see a $1,890 tax savings in combined income tax and payroll tax rate reductions over what was scheduled under the EGTRRA sunset.
Qualified capital gains and dividends currently are taxed at a maximum rate of 15 percent (zero percent for taxpayers in the 10- and 15-percent income tax brackets) for 2010. The Act continues this treatment for two years.
It also provides for treating dividends received from a regulated investment
company (RIC), real estate investment trust (REIT) and other qualified pass-through entities as qualified dividends for purposes of the reduced tax rates. Also extended are rules for collapsible corporations, the accumulated earnings tax and personal holding companies.
Itemized Deduction Limitation
The “Pease” limitation reduces the total amount of a higher-income individual’s otherwise allowable deductions. The Pease limitation is repealed for 2010 but was scheduled to return in full after 2010 under EGTRRA’s sunset rules. The Act extends repeal of the limitation for two years.
Personal Exemption Phaseout
Before 2010, taxpayers with incomes over certain thresholds were subject to the personal exemption phaseout (PEP). The PEP reduced the total amount of exemptions that may be claimed by two percent for each $2,500 or portion thereof ($1,250 for married couples filing separate returns) by which the taxpayer’s adjusted gross income exceeded the applicable threshold (projected for 2011 to start at $169,550 for singles, $254,350 for joint filers). Under EGTRRA, the PEP was repealed for 2010. The Act extends repeal of the PEP for two years.
Marriage Penalty Relief
EGTRRA provided relief from the so-called marriage penalty by increasing the basic standard deduction for a married couple filing a joint return to twice the amount for a single individual. The Act extends EGTRRA’s marriage penalty relief for two years.
Child Tax Credit
The Act extends the $1,000 child tax credit for two years, through December 31, 2012. Also extended for two years are enhancements to the credit made in EGTRRA, the 2009 Recovery Act and other bills. Under the EGTRRA sunset, the child credit would revert to $500 per qualifying child.
Earned Income Credit
EGTRRA and subsequent legislation temporarily increased the beginning and end points of the earned income tax credit, increased the credit for three or more children and made other taxpayer friendly changes. The enhanced EITC is now extended for two years.
EGTRRA increased the dollar limitation for the adoption credit and the income exclusion for employer-paid or reimbursed adoption expenses to $10,000 (indexed for inflation). The Patient Protection and Affordable Care Act increased the credit and exclusion by another $1,000 (adjusted for inflation) for 2010 and 2011 and also made the adoption credit refundable. The Act extends the enhancements in EGTRRA to the credit and exclusion amount through December 31, 2012.
Dependent Care Credit
A taxpayer who incurs expenses to care for a child under age 13 or for an incapacitated dependent or spouse to work or look for work can claim a dependent care credit. EGTRRA temporarily increased the maximum amount of eligible expenses for the dependent care credit from $2,400 to $3,000 (from $4,800 to $6,000 for more than one qualifying individual). EGTRRA also raised the maximum credit from 30 to 35 percent of qualifying expenses and provided for a reduction in the credit, but not below 20 percent, by one percentage point for each $2,000, or fraction thereof, of AGI above a $15,000 threshold. The enhanced dependent care credit is now extended for two years.
Employer-provided Child Care
Under EGTRRA, employers may qualify for a tax credit if they make available child care to employees before 2011. The credit reaches $150,000 for qualified costs. The Act extends the credit through December 31, 2012.
American Opportunity Tax Credit
The 2009 Recovery Act enhanced and renamed the Hope education credit as the American Opportunity Tax Credit (AOTC) for 2009 and 2010. The Act extends the AOTC for two years. Also extended are income limitations (the AOTC begins to phase out for single individuals with modified AGI of $80,000 ($160,000 for married couples filing jointly) and completely phases out for single individuals with modified AGI of $90,000 ($180,000 for married couples filing jointly).
The Act includes several provisions relating to educational assistance exclusion, student loan interest deduction, Coverdell Education Savings Accounts and scholarships.
Individual Tax Extenders
The Act extends a number of temporary individual tax incentives that expired at the end of 2009. These incentives, known as extenders, are extended for two years (2010 and 2011). The individual incentives extended in the Act are: state and local sales tax deduction; higher education tuition deduction; teacher’s classroom expense deduction; charitable contribution of IRA proceeds; and charitable contributions of appreciated property for conservation purpose.
ALTERNATIVE MINIMUM TAX
The Act provides an AMT “patch” intended to prevent the AMT from encroaching on middle-income taxpayers by providing higher exemption amounts and other targeted relief for 2010 and 2011. Without this patch, which expired at the end of 2009, an estimated 21 million additional households would be subject to its reach. The Act increases the exemption amounts for 2010 to $47,450 for individual taxpayers and to $72,450 for married taxpayers filing jointly. For 2011, the amounts would be increased to $48,450 for individuals and $74,450 for married taxpayers filing jointly.
PAYROLL TAX CUT
The Act reduces the employee-share of OASDI (Social Security tax) from 6.2 percent to 4.2 percent for wages earned in calendar year 2011 up to $106,800. Self employed individuals would pay 10.4 percent on self-employment income up to the threshold. The new payroll tax holiday is estimated to inject $120 billion into the economy in 2011.
FEDERAL ESTATE TAX
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 scheduled to be revived after 2010. Additional EGTRRA changes affected the gift tax and the generation-skipping transfer (GST) tax.
Estate Tax Compromise
The 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 scheduled to sunset on December 31, 2012.
Together with the revival of the estate tax, the Act eliminates the modified carryover basis rules and replaces them with the stepped up basis rules that had applied until 2010. Property with a stepped-up basis receives a basis equal to the property’s fair market value on the date of the decedent’s death (or on an alternate valuation date). Under a modified carryover basis that
EGTRRA had put into place for 2010, the executor may increase the basis of estate property only by a total of $1.3 million, with other estate property taking a carryover basis equal to the lesser of the decedent’s basis or the fair market value of the property on the decedent’s death.
Option for 2010
The Act gives estates of decedents dying after December 31, 2009 and before January 1, 2011, the option to elect not to come under the revived estate tax. It gives those estates the option to elect to apply (1) the estate tax based on the new 35 percent top rate and $5 million exemption, with stepped-up basis or (2) no estate tax and modified carryover basis rules under EGTRRA. Any election would be revocable only with the consent of the IRS.
The Act provides for “portability” between spouses of the maximum exclusion. 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. A deceased spousal exclusion amount would be available to the surviving spouse only if an election is made on a timely filed estate tax return. Portability would be available after December 31, 2010.
State death tax credit/deduction
EGTRRA repealed the state death tax credit for decedents dying after 2004 and replaced the credit with a deduction. Under EGTRRA’s sunset provisions, the credit, as it existed before 2002, is revived for decedents dying after 2010. The 2010 Act extends the deduction through 2012.
The Act gives estates of decedents dying after December 31, 2009 and before the date of enactment extended time (generally nine months) to perform certain acts. These include the filing of any return and the making of any payment.
For gifts made in 2010, the Act provides that gift tax is computed using a rate schedule having a top tax rate of 35 percent and a maximum applicable exclusion amount of $1 million. For gifts made after 2010, the gift tax is reunified with the estate tax with a top gift tax rate of 35 percent and a maximum applicable exclusion amount of $5 million.
The Act provides a $5 million exemption for 2010 (equal to the exclusion for estate tax purposes) with a GST tax rate of zero percent for 2010. For transfers made after 2010, the GST tax rate would be equal to the highest estate and gift tax rate in effect for the year (35 percent for 2011 and 2012). The Act also extends certain technical provisions under EGTRRA affecting the GST tax.
Also included are a series of business incentives, including provisions relating to: The Work Opportunity Tax Credit; 100 percent bonus depreciation; Code Sec. 179 expensing; research tax credit; small business capital gains; and numerous business tax extenders.
The Act also extends a number of energy tax incentives, primarily targeted to businesses, scheduled to expire after 2010. One popular energy incentive for individuals, the Code Sec. 25C residential energy property credit would be extended but with some limitations. Also extended are a series of disaster and charitable incentives.
To access the Special CCH Tax Briefing on the Tax Relief Act, click here.