Inside the New 2010 Tax Relief Act: Cuts, Credits, Exemptions
On December 17, President Obama signed the compromise legislation addressing the 2010 extender items in the income tax system. The act also contains important continuation of present income tax rates and business provisions for 2011 and after. A restoration of the estate tax is also included, but with an increased exemption and lower rate.
Here are the key points in this legislation:
Extension of income tax rates, capital gain and dividend rates, and the child credit
The 2010 income tax rate structure has been extended in its entirety for two years through 2012. Accordingly, the present six-bracket individual income tax system with rates from 10–35 percent moves ahead for 2011 and 2012 without change (other than minor inflation indexing). This includes continuation of the zero-percent capital gains rate for low-bracket taxpayers, the 15 percent capital gains rate for all others, and the continuation of the 15 percent top dividend rate. Also, the $1,000 per-child tax credit for lower and middle income households is extended.
Continuation of “extenders”
Virtually all of the “extenders” (provisions that Congress must renew annually) have been restored in the income tax system for 2010 and, in some cases, are extended through 2011. Some of the key extenders include:
- The alternative minimum tax (AMT) exemption, extended for both 2010 and 2011. This keeps the AMT system and regular income tax rates in tandem, as in the past.
- The ability of retirees to direct up to $100,000 of individual retirement account (IRA) funds to charity, and to count this toward their annual required minimum distribution (RMD). Further, there is an elective grace period until January 31, 2011, allowing an IRA-to-charity transfer to be treated as if made for 2010 for RMD purposes.
- Deductions such as the itemized sales tax for those in non-income-tax states, the college tuition deduction and credit, the teacher supplies deduction, and more.
Reduction of Social Security tax for 2011
The Social Security tax on the
employee share of wages is reduced from 6.2 percent to 4.2 percent for 2011 (but no change to the employer share). A similar 2 percent reduction applies for the self-employment tax affecting proprietors and partners. There is no phase-out of this privilege; all taxpayers regardless of income will receive this boost in take-home earnings for 2011. For those who reach the maximum $106,800 Social Security earnings, this represents a savings of $2,136. To a $50,000 wage earner, the savings would be $1,000. This 2 percent cut is a replacement for the “Making Work Pay” credit that applied to 1040s for 2009 and 2010, providing up to a $400 rebate for single filers and $800 for joint returns.
Expansion of bonus depreciation
For the last three years, Congress has allowed businesses to claim a 50 percent first-year deduction for new assets, in an attempt to help stimulate the economy by accelerating capital purchases. For 2011, this provision expands to a 100 percent first-year bonus depreciation deduction for new additions of machinery and equipment and certain leasehold improvements. This provision is retroactive and applies to new assets (but not used) placed in service after September 8, 2010. The 100 percent deduction applies throughout 2011 and then drops to 50 percent for 2012.
Chris Hesse, tax principal with LarsonAllen, noted that “the greatest benefit of the 100 percent deduction in 2011 will fall to those who can write off leasehold improvements. But those businesses will need to check with their tax advisor; there are a number of eligibility rules, including a requirement that the lease may not be between related parties.”
Extension of R&D credits
In a separate provision also important to many businesses, Congress extended the research and development (R&D) credit through 2011.
Changes in estate and gift taxation
For 2010 only, there was no estate tax. However, beginning in 2011, the estate tax and generation-skipping transfer tax is restored as follows:
- For 2011 and 2012, the per-person estate tax exemption is $5 million, with the rate on any excess amount at a flat 35 percent. In 2009, when the estate tax last applied, the exemption was $3.5 million, and the rate was 45 percent.
- For deaths in 2010, there is a choice of retaining the “no estate tax” regime or applying the 2011 estate tax system with the $5 million exemption. This is important practical relief for smaller estates for deaths that occurred in 2010, as it avoids the complicated carryover basis rules and reporting that applied under the no estate tax regime. Instead, the heirs simply receive a full step-up in the basis of assets equal to fair market value under the same rules that have existed in the past.
- For gifts after 2010, the gift tax and estate tax exemptions are unified into a single $5 million amount. This allows a greater amount of lifetime gifts than the previous $1 million limitation.
- Beginning in 2011, the executor of a deceased spouse may transfer any unused exemption to the surviving spouse. This is important simplification, assuring that a husband and wife together will have their complete $10 million exemption regardless of how assets are titled.
Hesse observed that “the increased estate tax exemption will simplify estate planning for many small business owners. And the two-year lock in the income tax and capital gains tax rates provide much-needed certainty for individual and business taxpayers. But recognize that all of these extensions end at midnight on December 31, 2012, when we revert back to higher income taxes and a lower estate tax exemption without further legislation.”
Andy Biebl, Tax Principal
abiebl@larsonallen.com or 612-397-3121
Chris Hesse, Tax Principal
chesse@larsonallen.com or 509-624-4315
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