Proposed New Tax Law Dec 2010

Senate close to passage of 2010 Tax Relief Act, featuring extension of Bush-era tax cuts & other tax breaks, plus stimulus measures

On December 13, the Senate by a vote of 83-15 invoked cloture (i.e., voted to cut off debate) on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act). The Senate is likely to approve the measure either late on the evening of December 14, or early the next day. The 2010 Tax Relief Act extends for two years the Bush-era tax cuts, provides significant estate tax relief, and includes a two-year AMT “patch.” However, it also contains a trove of other tax breaks for businesses and individuals, including 100% first-year writeoffs of qualifying property placed in service after Sept. 8, 2010 and before Jan. 1, 2012, a payroll/self-employment tax cut of two percentage points for 2011 for employees and self-employed individuals, and a host of extenders for businesses and individuals. Here's an overview of what's in the 2010 Tax Relief Act.

EGTRRA Tax Cuts Extended for Two Years

Under current law, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16 ), other than those made permanent or extended by subsequent legislation, sunset and won't apply to tax or limitation years beginning after 2010. (Sec. 901 of EGTRRA)
The 2010 Tax Relief Act postpones the Sec. 901 EGTRRA sunset rule for two years. That is, under the 2010 Tax Relief Act, the income tax provisions of EGTRRA, other than those made permanent or extended by subsequent legislation, will sunset and will not apply to tax or limitation years beginning after 2012 (instead of 2010). Thus, all of the following favorable tax rules (among others) will remain in place through 2012.
 
Tax rates. 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%). Additionally, 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.
 
According to the Joint Committee on Taxation Explanation of the 2010 Tax Relief Act, the tax rate schedules for 2011, as adjusted for inflation, will be as follows:

FOR MARRIED INDIVIDUALS FILING JOINT RETURNS
      AND SURVIVING SPOUSES, THE 2011 RATE BRACKETS WILL BE:
If taxable income is:                 The tax will be:
--------------------                  -----------
Not over $17,000                      10% of taxable income
Over $17,000 but not                  $1,700.00 plus 15% of the
  over $69,000                         excess over $17,000
Over $69,000 but not                  $9,500.00 plus 25% of the
  over $139,350                         excess over $69,000
Over $139,350 but not                 $27,087.50 plus 28% of the
  over $212,300                         excess over $139,350
Over $212,300 but not                 $47,513.50 plus 33% of the
  over $379,150                         excess over $212,300
Over $379,150                         $102,574.00 plus 35% of the
                                        excess over $379,150

FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND
         SURVIVING SPOUSES), THE 2011 RATE BRACKETS WILL BE:
If taxable income is:                 The tax will be:
--------------------                  ----------
Not over $8,500                       10% of taxable income
Over $8,500 but not                   $850.00 plus 15% of the
  over $34,500                           excess over $8,500
Over $34,500 but not                  $4,750.00 plus 25% of the
  over $83,600                           excess over $34,500
Over $83,600 but not                  $17,025.00 plus 28% of the
  over $174,400                          excess over $83,600
Over $174,400 but not                 $42,449.00 plus 33% of the
  over $379,150                          excess over $174,400
Over $379,150                         $110,016.50 plus 35% of the
                                         excess over $379,150

FOR HEADS OF HOUSEHOLDS, THE 2011 RATE
                      BRACKETS WILL BE:
If taxable income is:                 The tax will be:
--------------------                  -----------
Not over $12,150                      10% of taxable income
Over $12,150 but not                  $1,215.00 plus 15% of the
  over $46,250                           excess over $12,150
Over $46,250 but not                  $6,330.00 plus 25% of the
  over $119,400                          excess over $46,250
Over $119,400 but not                 $24,617.50 plus 28% of the
  over $193,350                          excess over $119,350
Over $193,350 but not                 $45,323.50 plus 33% of the
  over $379,150                          excess over $193,350
Over $379,150                         $106,637.50 plus 35% of the
                                         excess over $379,150

FOR MARRIEDS FILING SEPARATE RETURNS, THE 2011 RATE
                       BRACKETS WILL BE:
If taxable income is:                 The tax will be:
--------------------                  -----------
Not over $8,500                       10% of taxable income
Over $8,500 but not                   $850.50 plus 15% of the
  over $34,500                           excess over $8,500
Over $34,500 but not                  $4,750.00 plus 25% of the
  over $69,675                           excess over $34,500
Over $69,675 but not                  $13,543.75 plus 28% of the
  over $106,150                           excess over $69,675
Over $106,150 but not                 $23,756.75 plus 33% of the
  over $189,575                          excess over $106,150
Over $189,575                         $51,287.00 plus 35% of the
                                         excess over $189,575

 

Standard deduction for marrieds. EGTRRA increased the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return. If the EGTRRA sunset kicked in, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) would drop to 167% of the standard deduction for single taxpayers. The standard deduction for married taxpayers filing separately would continue to be one-half of the standard deduction for joint filers.
Under the 2010 Tax Reform Act, 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. (The standard deduction for marrieds filing separately is half of the joint filer amount.)
 
Pease and PEP limitations won't apply. For 2011 and 2012:

• Itemized deductions of higher-income taxpayers will not be reduced (under the EGTRRA sunset rule for the “Pease limitation,” after 2010 they would have been reduced by 3% of AGI above an inflation-adjusted figure, but the reduction couldn't exceed 80%).
• A higher-income taxpayer's personal exemptions will not be phased out when AGI exceeds an inflation-adjusted threshold (under the EGTRRA sunset rule for the “Pease limitation,” after 2010 they would have been phased out).
• Current law's rules for the following tax provisions also will remain in place through 2012: Coverdell Education Saving Accounts (CESAs), formerly called education IRAs; exclusion for employer-provided educational assistance under Code Sec. 127 ; exemption from the payments-for-services rule for amounts received under certain Government health professions scholarship programs; above-the-line student loan interest deduction; credit for employer-provided child care facilities; earned income tax credit (EITC); credit for household and dependent care; and child tax credit.

JGTRRA Rules for Capital Gains and Qualified Dividends Extended for Two Years

The bill defers for two years the sunset rule of Sec. 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, PL 108-27). Thus, through Dec. 31, 2012, long-term capital gain (with the exception of 28% rate gain and unrecaptured section 1250 gain) will continue to be taxed at a maximum rate of 15%. If the JGTRRA sunset rule went into effect, long-term capital gain would face a tax of 20% (18% for assets held more than five years)). And before 2013, qualified dividends paid to individuals will be taxed at the same rates as long-term capital gains (instead of being taxed under the JGTRRA sunset rule at the same rates that apply to ordinary income).

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

Under the 2010 Tax Reform Act, the AMT exemption amounts for 2010 will be as follows:

... Married individuals filing jointly and surviving spouses: $72,450, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $439,800);

... Unmarried individuals: $47,450, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $302,300) (different amount applies for a child subject to the kiddie tax); and

... Married individuals filing separately: $36,225, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $219,900). But AMTI is increased by the lesser of $36,225 or 25% of the excess of AMTI (without the exemption reduction) over $219,900.

Under the 2010 Tax Reform Act, the AMT exemption amounts for 2011 will be as follows:

... 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); and

... 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.

Without the “patch” in the 2010 Tax Reform Act, post-2009 AMT exemption amounts would have plummeted to their pre-EGTRRA levels. For 2010, they would have been $45,000 for married individuals filing jointly and surviving spouses, $33,750 for unmarried individuals; and $22,500 for married individuals filing separately.
Also for 2010 and 2011, many nonrefundable personal credits will be allowed against the AMT (without the “patch,” they couldn't offset AMT).

Estate Tax Relief

EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, lowered the gift tax rate to 35% and increased the gift tax exemption to $1 million for 2010. Under the EGTRRA sunset rule, the estate tax was set to return in 2011, with the top estate and gift tax rate reverting to 55%. For 2010, under EGTRRRA, the basis rules for inherited property were to be similar to the gift tax rules but with many opportunities for heirs to get increases in basis. Under the EGTRRA sunset rule, the pre-EGTRRA step-up in basis rules were to return for 2011.
Among other changes, the 2010 Tax Relief Act:

... Lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount (technically, the applicable exclusion amount) from $1 million to $5 million (as indexed 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, provides that the due date for actions (e.g., filing an estate tax return) is not to be earlier than the date that's 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.

Incentives for Businesses to Invest in Machinery and Equipment

The bill OKs the following major new incentives for businesses to invest in machinery and equipment:

(1) A 100% writeoff in the placed-in-service year of the cost of property eligible for bonus depreciation under Code Sec. 168(k) . This will apply for property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012;

(2) A 50% bonus first-year depreciation allowance under Code Sec. 168(k) for property placed in service after Dec. 31, 2011, and before Jan. 1, 2013;

(3) Extension through Dec. 31, 2012, of the election to accelerate the AMT credit instead of claiming additional first-year depreciation; and

(4) For tax years beginning after Dec. 31, 2011, setting the maximum expensing amount under Code Sec. 179 at $125,000 and the investment-based phaseout amount at $500,000 (under current law, the expensing figures drop from $500,000/$2 million for 2010 and 2011 to $25,000/$200,000 after 2011).

Temporary Employee/Self-Employed Payroll Tax Cut for 2011

Under current law, employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay 12.4% Social Security self-employment taxes on all their self-employment income up to the same threshold. For 2011, the 2010 Tax Reform Act gives a two-percentage-point payroll/self-employment tax holiday for employees and self-employeds. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.

Host of Expired Business Tax Breaks Retroactively Reinstated and Extended Through 2011

A host of business tax breaks that expired at the end of 2009 will be retroactively reinstated and extended through 2011, including:

... the research credit;

... the new markets tax credit;

... employer wage credit for activated reservists;

... 15-year writeoff for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements;

... 7-year writeoff 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;

... expensing of environmental remediation costs;

... allowance of the Code Sec. 199 domestic production activities deduction for activities in Puerto Rico; and

... the work opportunity tax credit.

Long List of Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011

Many tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011, including:

• the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers;
• the 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;
• the above-the-line deduction for qualified tuition and related expenses;
• the provision that 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);
• the increase in the monthly exclusion for employer-provided transit and vanpool benefits to that of the exclusion for employer-provided parking benefits. In addition, the 2010 Tax Reform Act will extend for an additional year (i.e., through 2011), the rule allowing premiums for mortgage insurance to be deductible as interest that is qualified residence interest.

Other Provisions Extended Through 2011

The list of energy-related provisions that will be extended through 2011 include: the $1.00 per gallon production tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon; the $1.00 per gallon production tax credit for diesel fuel created from biomass; the placed-in-service deadline for qualifying refined coal facilities; the credit for manufacturers of energy-efficient residential homes; the $0.50 per gallon alternative fuel tax credit (but the credit will not be extended for any liquid fuel derived from a pulp or paper manufacturing process); the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well; the Code Sec. 45M credit for US-based manufacture of energy-efficient clothes washers, dishwashers and refrigerators (with modified standards); the Code Sec. 25C credit for energy-efficient improvements to existing homes (reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act (standards for property eligible under Code Sec. 25C are updated to reflect improvements in energy efficiency); and the 30% investment tax credit for alternative vehicle refueling property.
Various disaster relief provisions also will be extended through 2011, including: the time for issuing New York Liberty Zone bonds, effective for bonds issued after Dec. 31, 2009; the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone; and the additional depreciation deduction claimed by businesses equal to 50% of the cost of new property investments made in the Gulf Opportunity Zone (expenditures in 2011 will be eligible if the property is placed in service by Dec. 31, 2011).

Overview of Small Business Jobs Act of 2010

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business. Here's a brief overview of the tax changes in the new law.
 
Tax breaks and incentives
 
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
 
The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
 
100% exclusion of gain from the sale of small business stock for qualifying stock acquired after Sept. 27, 2010 and before Jan. 1, 2011. Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don't exceed $50 million, and the corporation must meet active business requirements). Under the 2009 Recovery Act, the percentage exclusion for gain on QSBS sold by an individual was increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after Sept. 27, 2010 and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.
 
General business credits of eligible small businesses for 2010 allowed to be carried back five years. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
 
General business credits of eligible small businesses in 2010 aren't subject to AMT. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their MT in tax years beginning in 2010.
 
S corporation holding period. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. This holding period is reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.
 
Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).
 
Boosted deduction for start-up expenditures. The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.
 
Deductibility of health insurance for the purpose of calculating self-employment tax. The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.
 
Cell phones removed from listed property category. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.
 
Information reporting required for rental property expense payments. For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).
Increased information return penalties (effective for information returns required to be filed after Dec. 31, 2010).
 
Application of continuous levy to tax liabilities of certain federal contractors. For levies issued after Sept. 27, 2010, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).
Allow participants in governmental 457 plans to treat elective deferrals as Roth contributions. For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.
Allow rollovers from elective deferral plans to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately as of Sept. 27, 2010.

Recent Legislation - Small Business Jobs Act of 2010

The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business. Two of the most significant changes allow for faster cost recovery of business property. Here are the details.
 
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
 
The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
 
Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).