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Tax Announcements Tax Rates, Renews Expiring Provisions and Provides New Incentives for Investment
SummaryOn December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 (the “Act”). The Act extends current tax rates on individuals through 2012, reinstates the estate tax with a 35% tax rate for 2011 and 2012, and extends various other expiring tax provisions that had expired at the end of 2009 or were scheduled to expire at the end of 2010. The Act provides individual alternative minimum tax (“AMT”) relief for 2010 and 2011. The Act also provides for a reduction in employment taxes during 2011. This Tax Alert provides a brief summary of the principal provisions of the Act. Two-Year Extension of Individual Tax ReliefSignificant provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “EGTRRA”) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “JGTRRA”) were scheduled to expire at the end of 2010. The Act extends these provisions through the end of 2012. The Act also extends certain provisions of the American Recovery and Reinvestment Act of 2009 (the “ARRA”). Individual Income Tax BracketsThe Act extends the current 25%, 28%, 33%, and 35% tax brackets through 2012. Upon expiration, the brackets will revert to the previous 28%, 31%, 36%, and 39.6% rates. Prior to the enactment of the EGTRRA, individual taxpayers were subject to a single 15% tax rate at all taxable income levels below the level at which the 28% rate applied. The EGTRRA created a 10% tax rate for the lowest portion of the previous 15% tax bracket. The Act also extended through 2012 this lowest 10% bracket, which will be rejoined with the larger 15% bracket upon expiration. Personal Exemption and Itemized Deduction Phase-OutsThe EGTRRA repealed the phase-out for personal exemptions and the overall limitation on itemized deductions for 2010 only. The Act extends the repeal of both provisions through 2012. Capital Gain and Dividend RatesUnder changes made by the JGTRRA, the current long-term capital gain tax rate is zero for taxpayers whose capital gains would otherwise be subject to rates below 25% and 15% for taxpayers whose capital gains would otherwise be subject to rates at or above 25%. The Act extends these rates through 2012. Upon expiration the rates will increase to 10% and 20%, respectively. The JGTRRA also reduced the tax rate on qualified dividends from the otherwise applicable ordinary rates to the long-term capital gain rates. The Act extends this provision through 2012. Marriage Penalty ReliefThe EGTRRA provided marriage penalty tax relief in two forms. First, it increased the standard deduction for married taxpayers filing joint returns from 167% to 200% of the deduction for single filers. Second, it increased the range of the first three tax brackets for married taxpayers filing joint returns to 200% of that of single filers. The Act extends both of these provisions through 2012. Child Tax CreditUnder prior law, taxpayers could claim a $500 credit for each qualifying child under the age of 17. The credit is phased out beyond a certain level of income. The EGTRRA doubled the child tax credit from $500 to $1,000. The ARRA expanded the amount of the credit that can be refunded to 15% of earned income over $3,000. The Act extends these provisions through the end of 2012. Extension of Other EGTRRA, JGTRRA, and ARRA ProvisionsVarious other provisions of the EGTRRA, JGTRRA, and ARRA that would have expired at the end of 2010 have been extended through 2012 as well, including:
Individual AMT ReliefThe Act increases the AMT exemption amount for taxable years beginning in 2010 to $47,450 for single taxpayers and $72,450 for married taxpayers filing joint returns. These amounts are increased to $48,450 and $74,450, respectively, for 2011. The Act also allows nonrefundable personal tax credits to be used to offset AMT for 2010 and 2011. Estate Tax ProvisionsPrior LawThe EGTRRA phased out the estate and generation-skipping transfer taxes over a period of several years, with both taxes fully repealed in 2010. The EGTRRA also provided for carryover basis rules for assets passing through certain estates in 2010. In addition the EGTRRA decoupled the gift tax from the estate tax. Under the EGTRRA provisions the gift tax rate is 35% in 2010, with a lifetime credit equivalent to an exclusion of the first $1,000,000 of otherwise taxable gifts. All these provisions expire at the end of 2010, at which point the estate, generation–skipping transfer, and gift taxes would have been reinstated at pre-2001 levels. A rate of 55% would have applied to transfers subject to both the estate and gift tax, with the lifetime credit equivalent to an exclusion of $1,000,000. Reinstatement of Estate Tax/Generation Skipping TaxThe Act reinstates the estate tax for 2010 through 2012 with a top tax rate of 35%, but with special transitional provisions in effect for 2010 only. The individual lifetime credit amount is increased to an equivalent exemption of $5 million ($10 million per couple). The carryover basis rules are eliminated beginning in 2011. For estates of decedents dying in 2010, the estate can elect to either apply the new estate tax provisions of the Act or apply the carryover basis rules of the EGTRRA and pay no estate tax. The generation-skipping transfer tax is also reinstated effective for 2010-2012 with a $5 million exemption amount for each of these years. The flat tax rate for GST transfers will be 0% for 2010 and 35% for 2011 and 2012. The zero percent tax rate for 2010 eliminates any tax on GST taxable transfers occurring in 2010. Irrevocable transfers to trusts in 2010 that have a potential for future generation skipping transfers post 2010 would be subject to the GST tax at that time depending on the inclusion ratio of the trust. Modifications to Gift TaxThe Act reunifies the gift and estate taxes by allowing taxpayers to use their same $5 million lifetime equivalent exclusion amount against taxable gifts, as well as amounts passing through their estates, for gifts made during 2011 and 2012. The top tax rate for gifts is also set at 35% for 2011 and 2012. The top rate for gifts for 2010 remains 35% and the lifetime equivalent exclusion also remains at $1 million. Transfer of Exclusion Amount to SpouseThe Act allows the executor of a deceased spouse to transfer any exclusion amount that is not used by the deceased spouse to the surviving spouse. Sunset ProvisionsThe changes made by the Act to the estate, generation-skipping transfer, and gift taxes only apply through 2012. In 2013, the provisions prior to the EGTRRA, including the 55% maximum rate and $1 million exemption equivalent, will be reinstated. Investment IncentivesBonus DepreciationA bonus depreciation allowance had previously applied to certain property placed in service between January 1, 2008, and December 31, 2010. In order to qualify for bonus deprecation, the property must be (a) property to which the modified accelerated cost recovery system applies with a recovery period of 20 years or less, (b) water utility property, (c) most computer software, or (d) qualified leasehold improvement property. Original use of the property must commence with the taxpayer; used property will generally not qualify. The first-year allowance is 50% of the basis of the qualifying property, with the remaining 50% being depreciated under generally applicable rules. Taxpayers may elect not to claim bonus depreciation on a class-by-class basis. The Act extends and expands the bonus depreciation provisions by allowing taxpayers to claim a 100% bonus allowance on qualifying property placed in service after September 8, 2010, and through December 31, 2011. For qualifying property placed in service after December 31, 2011, and through December 31, 2012, the bonus depreciation allowance will be 50% of the basis of such property. In addition, the Act allows certain taxpayers to elect to convert old AMT credits to refundable credits (within certain limitations) in lieu of taking bonus depreciation for property placed in service in 2011 or 2012. As under prior law, taxpayers must agree to depreciate qualifying property on a straight-line basis in addition to forgoing bonus depreciation. Additional First-Year ExpensingBusiness taxpayers may elect to deduct the cost of certain fixed assets placed in service during the taxable year under the section 179 “expensing” provisions. For 2010 and 2011, the allowance is limited to $500,000, but the limitation is phased out to the extent that the cost of qualifying property placed in service during the year exceeds $2 million. Within this overall annual limitation of $500,000, taxpayers could also deduct the cost of certain real property acquisitions up to $250,000 per year. For 2012 and subsequent years, the allowance would have been reduced to $25,000, with the limitation phased out if the cost of qualifying property exceeds $200,000. Off-the-shelf computer software is qualifying property for taxable years beginning before 2012. The Act increases the allowance to $125,000 for assets placed in service during 2012, with the allowance phased out if the cost of qualifying property exceeds $500,000. The $25,000/$200,000 parameters are now scheduled to return in 2013. Off-the-shelf computer software is qualifying property for taxable years beginning before 2013. Temporary Payroll Tax CutUnder current law, all employees pay 6.2% of their wages up to a certain threshold ($106,800 in 2011) as Social Security taxes (in addition to Medicare Hospital Insurance taxes). Employers pay an equal amount. Self-employed individuals pay 12.4% of their self-employment income up to the same threshold as social security taxes. The Act reduces the employee’s share of the tax to 4.2% for 2011 only. Employers must still pay 6.2%. The social security component of the self-employment tax is reduced to 10.4% for 2011 only. Extension of Expiring ProvisionsEnergy IncentivesThe Act extends various energy incentives that have expired or would have expired as follows:
Individual Tax ReliefThe Act extends various individual tax provisions that had expired or would have expired, as follows:
The above-the-line deduction for qualified tuition and related expenses is extended two years through 2011.
Business Tax ReliefThe Act extends numerous business tax provisions that had expired or would have expired, as follows:
The look-through treatment of payments between related controlled foreign corporations is extended to taxable years of a foreign corporation beginning before January 1, 2012 (and taxable years of United States shareholders with or within such taxable year ends).
Disaster Relief ProvisionsThe Act extends certain disaster relief tax provisions that had expired or would have expired, as follows:
To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Material discussed in this tax alert is meant to provide general information and should not be acted on without professional advice.
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