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Focus On Taxation: Tax Extenders Bill Signed Into Law

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President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 on Friday, December 17, 2010 (the "Act").
December 21, 2010

President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 on Friday, December 17, 2010 (the "Act"). The major provisions of this Act include:

  • Postponement of the sunset of the 2001 and 2003 tax cuts
  • Reduction of the estate tax
  • Extension of a large number of expired provisions
  • Continuation of unemployment benefits

In addition, the Act includes provisions covering:

  • Estate tax
  • Expiring tax cuts and provisions
  • Patch of the alternative minimum tax (AMT)

In general, the following favorable tax rules (among others) remain in place through 2012. The summary below highlights several high profile provisions, but is not intended to be a complete discussion of the Act.

FOR INDIVIDUALS

Tax Rates Remain For Two Years

  • The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%)
  • The size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% (instead of dropping to 167%) of the 15% tax bracket for individual filers
  • The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% (rather than 167%) of the standard deduction for single taxpayers for 2011
  • Itemized deductions of higher-income taxpayers will not be reduced
  • A higher-income taxpayer's personal exemptions will not be phased out when AGI exceeds an inflation-adjusted threshold

Capital Gains and Qualified Dividends Extended for Two Years

  • Qualified capital gains and dividends will continue to be taxed at a maximum rate of 15% for 2010, 2011 and 2012

Alternative Minimum Tax (AMT) “Patched” for Two Years

  • Married individuals filing jointly and surviving spouses: $74,450, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $447,800)
  • Unmarried individuals: $48,450, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $306,300) (different amount applies for a child subject to the kiddie tax)
  • Married individuals filing separately: $37,225, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $223,900). But AMTI is increased by the lesser of $37,225 or 25% of the excess of AMTI (without the exemption reduction) over $223,900

Estate Tax Relief

  • Lowers estate and Generational Skipping Transfer (GST) taxes for 2011 and 2012 by increasing the exemption amount (technically, the applicable exclusion amount) from $1 million to $5 million (as indexed and rounded to the nearest multiple of $10,000 after 2011) and reducing the top rate from 55% to 35%
  • Allows estates of decedents dying in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis or (2) no estate tax and modified carryover basis. In technical terms, the Act achieves this choice by making the estate tax and basis changes effective retroactively for estates of decedents dying after 2009 but allowing the opt-out choice for estates of decedents dying in 2010
  • For gifts made after Dec. 31, 2010, reunifies the gift tax with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%
  • Provides that the GST tax exemption for decedents dying or gifts made after Dec. 31, 2009, is equal to the applicable exclusion amount for estate tax purposes (e.g., $5 million for 2010). Therefore, up to $5 million in GST tax exemption may be allocated to a trust created or funded during 2010. Although the GST tax is applicable in 2010, the GST tax rate for transfers made during 2010 is 0%. The GST tax rate for transfers made in 2011 and 2012 will be 35%
  • For a decedent dying after Dec. 31, 2009, and before the enactment date, it provides that the due date for filing an estate tax return, making any payment of estate tax, and disclaiming an interest in property passing by reason of death is not to be earlier than the date nine months after the enactment date
  • Effective for estates of decedents dying after Dec. 31, 2010, allows the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse

Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011

  • $250 above-the-line deduction for certain expenses of elementary and secondary school teachers
  • An election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes
  • Increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes
  • Above-the-line deduction for qualified tuition and related expenses
  • Permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010)
  • Increase in the monthly exclusion for employer-provided transit and vanpool benefits equal to that of the exclusion for employer-provided parking benefits (i.e., $230 per month)
  • Treatment of mortgage insurance premiums as deductible qualified residence interest
  • Exclusion of 100% of gain on certain small business stock

FOR BUSINESSES

Incentives for Businesses to Invest in Machinery and Equipment

  • A 100% write-off in the placed-in-service year of the cost of property eligible for bonus depreciation. This will apply for property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012
  • A 50% bonus first-year depreciation allowance for property placed in service after Dec. 31, 2011, and before Jan. 1, 2013
  • Extension through Dec. 31, 2012, of the election to accelerate the AMT credit instead of claiming additional first-year depreciation
  • For tax years beginning after Dec. 31, 2011, setting the maximum expensing amount at $125,000 and the investment-based phase-out amount at $500,000
  • For 2010 and 2011, the expensing amount is $500,000 and the investment limit is $2 million

Temporary Employee/Self-Employed Payroll Tax Cut for 2011

  • Gives a two-percentage-point payroll/self-employment tax holiday for employees and self-employeds.

Expired Business Tax Breaks Retroactively Reinstated and Extended Through 2011

  • Research credit
  • Indian employment tax credit
  • New markets tax credit
  • 15-year write-off for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements
  • 7-year write-off for motorsports entertainment facilities
  • Enhanced charitable deductions for contributions of food inventory, for contributions of book
  • inventories to public schools and for corporate contributions of computer equipment for educational purposes
  • Election to expense mine safety equipment
  • Special expensing rules for certain film and television products;
  • Expensing of environmental remediation costs
  • Allowance of the domestic production activities deduction for activities in Puerto Rico
  • Modification of tax treatment of certain payments to controlling exempt organizations
  • Treatment of certain dividends of regulated investment companies (RICs)
  • RIC qualified investment entity treatment under FIRPTA
  • Exceptions for active financing income
  • Look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules
  • Basis adjustment to stock of S corporations making charitable contributions of property
  • Empowerment zone tax incentives
  • Tax incentives for investment in the District of Columbia
  • Temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands
  • American Samoa economic development credit
  • The work opportunity tax credit
  • Qualified zone academy bonds.
  • Extension of various business energy incentives

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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