Press Room: Tax Release
New Tax Legislation - Executive Summary
On Friday, December 17, 2010, the President signed into law The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act). The Act extends the so-called Bush-era tax cuts on earned income and certain investment income and also contains a number of important personal and business tax provisions that will be of interest to a wide variety of taxpayers. The following is an executive summary of some of the key provisions of the Act. We have set out in separate sections below the significant provisions related to businesses and those related to individuals.
Key Individual and Transfer Tax Provisions
The Act extends the Bush-era tax cuts on the earned income of individuals and on dividends and capital gains. It also establishes new transfer tax rates and exemptions. Significant changes are described below.
- One year reduction in Social Security payroll tax for wage earners and self-employed individuals from 6.2 and 12.4% to 4.2 and 10.4%, respectively. Self-employed taxpayers may continue to deduct one-half of self-employment taxes as if this reduction had not occurred.
- Existing rates on earned income (top rate 35%), capital gains (15%) and dividends (15%) will remain intact.
- Exemption amount for AMT increased to $47,450 and $72,450 for unmarried and married taxpayers, respectively. For 2011, the exemption amounts are $48,450 and $74,450 for unmarried and married taxpayers, respectively.
Transfer Tax Changes
- Lifetime estate and gift tax exemptions are unified and increased to $5,000,000.
- The generation skipping tax (GST) exemption is increased to $5,000,000.
- Lifetime exemption is now portable between spouses meaning that an exemption that is unused at the death of the first spouse may be carried over and used by the surviving spouse.
- Maximum rate for both gift and estate tax is reduced to 35% from 45% in 2009 and the 55% rate that would have otherwise taken effect in 2011.
- Generally, these changes apply to transfers made on or after January 1, 2011. Special statute of limitation provisions are provided.
- The generation skipping tax is reinstated for 2010, but the tax rate on transfers is zero and the exemption amount is $5,000,000. This permits unique planning opportunities to be implemented before December 31, 2010.
- Estates of decedents dying in 2010 have a choice to either: (1) utilize the $5,000,000 estate tax exemption, apply the 35% top rate, and receive a full basis step up, or (2) opt out so that no estate tax is due, but there would be a limited ability to step up the basis of assets transmitted by the estate.
Points of Interest:
- For 2010, estates may apply former 2010 law, i.e., no estate tax and modified carryover basis rules.
- Changes to estate and GST taxes are retroactive to beginning of 2010; gift tax changes are effective beginning on January 1, 2011, but will expire in 2013. Unless Congress acts, the transfer tax regime that existed prior to 2001 will come back into effect.
- Gift tax continues to be less expensive than estate tax since gift tax is calculated estate tax “exclusive,” meaning there is no tax on a tax, while estate tax is calculated tax “inclusive,” where a tax is imposed on the tax so calculated.
- Taxpayers should consider postponing gifts that would trigger gift tax until January 1, 2011, since additional exemption is available in 2011.
- Given the substantial increase in exemptions, testamentary documents that contain references to exemption amounts should be reviewed to ensure that the results of any formula clauses contained therein are still consistent with intentions. In addition, the new portability of exemption may permit more flexibility than is currently contained in many documents so operative documents may need to be amended to ensure that personal representatives and trustees are authorized to make the appropriate elections.
Key Business Tax Provisions
Changes to Important Business Incentives
- Enhanced Bonus Depreciation. The Act extends 50% bonus depreciation for certain “qualified property” and provides for a 100% expensing allowance for property placed in service between September 9, 2010, and December 31, 2011. It also includes an elective refundable alternative minimum tax (AMT) credit in lieu of bonus depreciation under Sec. 168(k)(4)(I) for property placed in service in 2011 and 2012.1 This election is similar to the Sec. 168(k)(4) election that was effective in 2009 except that unused research credits cannot be used in the computation of refundable credits.
Point of Interest: As in the past, bonus depreciation in 2011 and 2012 will not be subject to AMT add-back. An election to claim AMT credit may be applied to monetize only credits generated in tax years beginning before 2006.
- Small Business Expensing. The Sec. 179 small-business expensing limitation for tax years beginning in 2012 will be $125,000 and will be phased out if Sec. 179 property exceeds $500,000. Under the Small Business Jobs Act, the small-business expensing limits for years beginning in 2010 and 2011 are $500,000 and are reduced if Sec. 179 property exceeds $2 million.
A number of temporary tax credits and incentives have been extended through the 2010 and 2011 calendar years. Because several of these have retroactive effective dates, fiscal year taxpayers may need to amend returns to take advantage of these provisions. Some of the items extended include provisions addressing:
- The research credit.
- 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.
- Special expensing rules for certain film and television productions.
- Expensing of environmental remediation costs.
- Modification of tax treatment of certain payments to controlling exempt organizations.
- The treatment of certain dividends of regulated investment companies.
- Basis adjustment of stock of S corporations making charitable contributions of property.
- The work opportunity tax credit.
- Temporary exclusion of 100% of gain on certain “qualified small business stock.”
- Indian employment tax credit.
- The new markets tax credit.
- 7-year recovery period for motorsports entertainment complexes.
- Accelerated depreciation for business property on an Indian reservation.
- The Sec. 199 deduction with respect to income attributable to domestic production activities in Puerto Rico.
- Empowerment zone tax incentives.
- Tax incentives for investment in the District of Columbia.2
- The exceptions from SubPart F income for active financing income and for certain income received from related parties.
Various energy related credits and incentives have been extended for two years and, in some cases, the extensions are retroactive. Significant provisions include:
- Biodiesel and renewable diesel income and excise tax credit.
- Refundable credit for alternative fuel and fuel mixtures.
- Suspension of limitation on percentage depletion for oil and gas from marginal wells.
- Grants for specified energy property placed in service through 2011.
- Income and excise tax credit for certain alcohol fuels and ethanol (through 2011).
The Act contains many important provisions that will likely have an immediate effect on businesses and individuals. To learn more about how the Act may affect you, please consult your WTAS tax professional.
1 The rules governing this AMT credit are complex. Taxpayers should consult their WTAS advisor to assess whether an election is beneficial.
2 A number of other credits were also extended.