2010 NEW Tax Law Summary

reprinted from Business Accounting Insider, 12/29/10

The following provides a brief summary of some of the tax provisions of the Tax Relief, Unemployment Insurance Re-authorization, and Job Creation Act of 2010 (2010 Tax Relief Act) as signed into law by President Obama on December 17, 2010.

Tax Rates

Individuals’ taxable income will continue to be subject to six tax rates, 10, 15, 25, 28, 33 and 35 percent through 2012. Also, the expanded 15percent bracket for married joint filers, to provide marriage penalty relief, is extended through 2012. Estates’ taxable income will continue to be subject to five tax rates, 15, 25, 28, 33 and 35 percent through 2012.

Capital Gains and Qualified Dividends Rates

The uncertainty surrounding planning for capital gains is temporarily over as the 2010 Tax Relief Act has extended the 0 and 15 percent rates on adjusted net capital gains through 2012. Also extended is the treatment of qualified dividend income as adjusted net capital gain, taxable at the same 0 and 15 percent maximum rates through 2012. The Act also extends the 0 and 15 percent AMT rates on adjusted net capital gains through 2012.

Employee’s Payroll Tax Reduction

In place of the Making Working Pay Credit, the 2010 Tax Relief Act reduces the employee portion of Social Security taxes from 6.2 to 4.2 percent for 2011 wages (2011 only). The employer portion remains at 6.2 percent. A similar rate reduction applies to the railroad retirement tax.

Self-Employed SECA Tax Changes

The 2010 Tax Relief Act reduces self-employed individuals’ SECA tax from 12.4 percent to 10.4 percent for earned income in 2011. In addition, the above-the-line deduction for SECA taxes paid is increased from 50 percent to 59.6 percent for 2011 (2011 only).

Estate and GST Tax and Basis

The 2010 Tax relief Act reinstates the estate and Generation-Skipping Transfer (GST) taxes for decedents dying, and transfers made, after December 31, 2009. As a result, estates of decedents dying in 2010 are subject to the estate tax, unless the executor elects to have the carryover basis rules apply instead. If the executor does not make the election, the recipient of property will receive date-of-death fair market value basis under the basis rules and will be subject to estate tax. If the carryover basis is not elected, the lifetime exclusion amount for estates of decedents dying in 2010 is $5 million. The Act also provides that, for generation-skipping transfers made in 2010, the applicable tax rate is zero (congress gave this provision so as not to penalize taxpayers who relied on the repeal of the GST tax in 2010 before enactment of this law).

Estate and GST Extension of Time to File, Pay, and Make Disclaimers

The 2010 Tax Relief Act provides that, for estates of decedents dying after December 31, 2009 and before December 17, 2010, the due date for (1) filing an estate tax return, (2) paying the estate tax, and (3) making a disclaimer of an interest in property passing by reason of the decedent’s death, is nine months after December 17, 2010. Likewise, for any generation-skipping transfers made after December 31, 2009 and before December 17, 2010, the due date for filing any GST tax return, including any election required to be made on the return, is nine months after December 17, 2010.

Estate and GST Tax Exemption

The 2010 Tax Relief Act provides that, for estate of decedents dying after 2010, the applicable exclusion amount is the sum of (1) the “basic exclusion amount” ($5 million for estates of decedents dying in 2011) and (2) in the case of a surviving spouse, the “deceased spousal unused exclusion amount.” For estates of decedents dying after 2011, the $5 million basic exclusion amount will be increased by cost of living adjustments. The Act equates the GST tax exemption to the “basic exclusion amount” of $5 million, indexed for inflation, without regard to the “deceased spousal unused exclusion amount.”

Maximum Estate and Gift Tax Rate

The maximum estate and gift tax rate for transfers over the lifetime exclusion is 35 percent for 2010 through 2012. Under the 2010 Tax Relief Act, for gifts made in 2010, the lifetime exclusion is $1 million. However, for gifts made after December 31, 2010, the gift tax lifetime exclusion reunifies with the estate tax lifetime exclusion of $5 million.

Estate Tax Exclusion Portability

Under the 2010 Tax Relief Act, any applicable exclusion amount that remains unused as of the death of a spouse who dies after December 31, 2010 generally is available for use by the surviving spouse, as an addition to the surviving spouse’s applicable exclusion amount. A deceased spousal unused exclusion amount may not be taken into account by a surviving spouse unless the executor of the estate of the deceased spouse files an estate tax return on which the amount is computed, and makes an election on the return that the amount may be taken into account by the surviving spouse. The election, once made, is irrevocable and must be timely filed. The GST exemption is not portable.

AMT Patch

Congress has come through with another AMT “Patch” that increased the individual AMT exemption amounts for 2010 and 2011. These amounts will increase for inflation in 2011. The AMT exemption amounts for 2010 are:

• $72,450 (up from $70,950 in 2009) for married couples filing a joint return and surviving spouses
• $47,450 (up from $46,700 in 2009) for an individual who isn’t married or a surviving spouse
• $36,225 (up from $35,475 in 2009) for married individuals filing separate returns

Nonrefundable Personal Credits Can Off-Set AMT

The 2010 Tax Relief Act allows an individual to offset entire regular tax liability and AMT liability by the nonrefundable personal credits for 2010 and 2011, i.e. the child tax credit, dependent care credit, lifetime learning credit, American opportunity tax credit, etc.

Child Tax Credit

The 2010 Tax Relief Act extends provision that the $1,000 per child amount of the Child Tax Credit and the earned income formula for determining the refundable portion of the credit are extended through 2012.

Non-Business Energy Property Credit

The 2010 Tax Relief Act extends the credit for one year and restores the amount to 10% of the amounts paid for qualified energy efficiency improvements and the amounts paid for residential energy property expenditures. The Act allows the credit for windows, skylights, and doors that meet Energy Star standards and efficiency standards for furnaces, boilers, and stoves.

Personal Exemption Phase-Out and Overall Limitation on Itemized Deductions

Set to expire after 2010, the Act reinstates the personal exemption phase-out rules through 2012 and the limitation of itemized deductions through 2012.

Standard Deduction Marriage Penalty Relief

The 2010 Tax Relief Act increases the standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual through 2012.

Election to Claim Itemized Deduction for State/Local Sales Tax

The 2010 Tax Relief Act retroactively extends the provision to allow taxpayers to deduct state and local sales taxes in lieu of state and local income taxes through 2011.

Educational Credit and Deductions

The Act extends the American Opportunity Tax Credit (AOTC) for higher education expenses through 2012. The maximum AOTC is $2,500 per eligible student per year. The credit is allowed for each of the first four years of a student’s post-secondary education and 40% of the credit is refundable. One item to note is that the Act removed computer expenses from the list of qualified eligible expenses for the credit. The 2010 Act also extends the Qualified Tuition Deduction through 2011 and the Student Loan Interest Deduction through 2012.

Bonus Depreciation and AMT Depreciation Relief

The bonus depreciation rate is 100 percent for qualifying property that is (1) placed in service and acquired after September 8, 2010 and before January 1, 2012, or (2) acquired after September 8, 2010 and before January 1, 2012, but placed in service before January 1, 2013 if the property is qualified aircraft or long-production-period property. In addition to extending the eligibility period for bonus depreciation, the extension of the placed-in-service deadline also extends the eligibility period for obtaining exemption from the AMT depreciation adjustment. For 2012, bonus depreciation reverts back to 50 percent and it is the last year bonus depreciation is available.

15-Year MACRS Depreciation for Qualified Improvement Property

The 15-year recovery period for qualified leasehold improvements, qualified retail improvements, and qualified restaurant improvement property has been extended retroactively for 2010 through 2011.

Research Credit

The 2010 Tax Relief Act extends the research credit retroactively for 2010 through 2011. The credit is generally equal to 20 percent of the amount by which the taxpayers’ qualified research expenses exceed a specific base amount unless the taxpayer elects the alternative simplified credit.

New Markets Tax Credit

For qualified equity investments in a qualified community development entity, the New Markets Tax Credit has been extended through 2011, subject to a $3.5 million maximum annual amount.

Tax-Free IRA Distributions Donated to Charity

The 2010 Tax Relief Act extends the exclusion that allows taxpayers to exclude from income up to $100,000 of qualified charitable distributions from an IRA or Roth IRA through 2011. A qualified charitable distribution is any otherwise taxable distribution from an IRA or Roth IRA that is made directly by the IRA trustee to a qualified charitable organization (certain organizations don't qualify) and is made on or after the date on which the individual whose benefit the IRA is maintained has attained age 70^1/2. Under a special rule, an IRA owner may elect to treat qualified charitable distributions made during January 2011 as though they were made during 2010.

The information contained in this article does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. This information is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer.