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Insights & Alerts
December 17, 2010

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

On Friday, December 17, 2010, President Obama signed the hotly debated and long anticipated, Tax Hike Prevention Act (formerly the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.) This Act extends the framework to extend many of the Bush-era individual and capital gain/dividend tax cuts for individuals over the next two years. Among some of its other provisions, the Act calls for a reduction in payroll taxes, increases bonus depreciation and AMT relief and reinstates the estate tax. A summary of the Act’s highlights and how they may affect individuals and businesses follow.

The passage of this Act provides some certainty in tax planning for at least the next two years.

INDIVIDUAL INCENTIVES

Individual Rates
The individual rates were scheduled to revert from a top rate of 35% to a top rate of 39.6% after December 31, 2010. The Act extends the reduced income tax rates currently in place for ordinary income, capital gains and dividends for two years, through December 31, 2012 as reflected in the chart below. 

INDIVIDUAL TAX BRACKETS AS ENACTED
  SINGLE JOINT 2011-2012
ORDINARY INCOME TAX BRACKETS $0 – $8,500 $0 – $17,000 10%
$8,501 – $34,500 $17,001 – $69,000 15%
  $34,501 – $83,600 $69,001 – $139,350 25%
  $83,601 – $174,400 $139,351 – $212,300 28%
  $174,401 –$379,150 $212,300 – $379,150 33%
  Over $379,150 Over $379,150 35%
Capital Gains Top Rate   15%
Dividend Top Rate   15%
Interest Income Top Rate   35%

 

After 2012, individuals are scheduled to face additional taxes in the form of the .9% additional Medicare Tax and a 3.8% Medicare contribution tax.
Since the 15 percent rate stays in effect, the generous IC-DISC tax benefit for exporters also stays in place.
The zero rate for capital gains and dividends for those individuals in the bottom brackets will continue to apply.

Itemized Deductions
Prior to 2010, a limitation reduced the total allowable itemized deductions for higher-income individuals. The limitation, known as the Pease limitation, was repealed for 2010. The Act extends the repeal through December 31, 2012 allowing all taxpayers to use all their itemized deductions.

Personal Exemption Phase Out
Before 2010, taxpayers with income over certain thresholds were subject to a personal exemption phase out (known as PEP.) This phase out was repealed for 2010. The Act extends the repeal of PEP through December 31, 2012.

Marriage Penalty
Marriage penalty relief has been extended through December 31, 2012 by increasing the standard deduction and the size of the 15 percent income tax rate bracket for married couples filing jointly to twice the amount for a single individual.

Child Tax Credit
The Child Tax Credit was scheduled to revert to $500 per qualifying child. The Act extends the $1,000 child tax credit for two years through December 31, 2012. (The credit continues to be phased out for most taxpayers with adjusted gross income in excess of $110,000.)

Earned Income Credit
The Earned Income Credit remains increased for two years for qualifying taxpayers with three or more children.

Adoption Credit
The enhancements to the Adoption Credit detailed in previous legislation remain in place under the Act through December 31, 2012. The Credit is $11,000, indexed for inflation, and can be refundable.

Dependent Care Credit
The Dependent Care Credit provides a credit to taxpayers who incur expenses for children under age 13 or for incapacitated dependents or spouse. The Act extends through December 31, 2012 the enhanced Dependent Care Credit.  The credit is based on a maximum 35% up to $3,000 (or $6,000 for more than one dependent.)

Employer Provided Child Care
Employers may continue to qualify for tax credits for making child care available to employees through December 31, 2012.

Educational Programs
The American Opportunity Tax Credit (AOTC) has been extended through December 31, 2012. Formerly known as the Hope Credit, the AOTC provides a maximum credit of $2,500 for qualifying higher education expenses for four years of post secondary education. The credit is allowed to offset AMT with up to 40% refundable.

Employees can continue to exclude up to $5,250 in employer provided education assistance annually from income and employment taxes through December 31, 2012. In addition, graduate school tuition will continue to qualify.

Student loan interest and qualified tuition expenses will continue to be allowed as an above-the-line deduction for 2011.

Certain scholarships, such as the National Health Services Corps Scholarship and the Armed Forces Scholarship Program, will continue to be excluded from income through December 31, 2012.

The $2,000 contribution limit to a Coverdell Education Savings Program is also extended.

Individual Extenders
The Act includes certain individual tax incentive extenders that had expired at the end of 2009. These extenders will be available to individuals through December 31, 2010 and include:

  • State and local sales tax deduction
  • Higher education tuition deduction
  • Teacher classroom expense deduction
  • Charity contribution of IRA proceeds
  • Charity contribution of appreciated property for conservation purposes
  • Deduction for mortgage insurance premiums

The Act does not extend the additional standard deduction for real property taxes which expired in 2009.

Alternative Minimum Tax
The Act (once again) provides a “patch” of the Alternative Minimum Tax (AMT) that will retroactively increase for 2010 and again increases for 2011 as follows:

AMT  “PATCH"
Alternative minimum tax exemption for 2010 and 2011
  2009 2010 2011
Single/head of household $46,700 $47,450 $48,450
Married filing jointly $69,950 $72,450 $74,450
Married filing separately $34,975 $36,225 $37,225

 

Without the patch, which had expired at the end of 2009, an estimated 20 million taxpayers may have been subjected to AMT.

Payroll Tax Cut
The Act reduces the employee share of Social Security Tax (OASDI) from 6.2% to 4.2% for wages earned in calendar year 2011 up to $106,800. Self employed individuals would pay a combined rate of 13.3% on self employment income, reduced from a combined rate of 15.3%, up to the same threshold. The payroll tax holiday is expected to inject billions into the economy.

The change only applies to the OASDI and not the Medicare portion of the payroll and self employment taxes. Individuals earning above the FICA cap of $106,800 will receive a $2,136 tax benefit in 2011. This is an employee side cut only, as the employer’s share of OASDI will remain at 6.2%.

Employment Insurance
The Act provides for a temporary extension of unemployment  insurance for one year. The unemployed will get a 13-month extension of the deadline to file for additional unemployment benefits , which can be as high as 99 weeks in states hit hardest by job loss.

BUSINESS INCENTIVES

Bonus Depreciation
The Act increases the bonus depreciation from 50% to 100% for qualified investments made after September 9, 2010 and before December 31, 2011. The Act also makes 50% bonus depreciation available  for property placed in service during 2012. (Longer periods may apply for certain aircraft and property with long production periods.) This provision is one of the most generous of the Act and is expected to stimulate business activity.

Property eligible for bonus depreciation includes original use MACRS property with a useful life of 20 years or less, computer software, qualified leasehold improvements and water utility property. Bonus depreciation is not limited to smaller businesses nor is it capped at certain dollar levels and is more expansive then Section 179 expensing.

The Act also extends a 2009 provision which provides an election to accelerate AMT and research credits in lieu of claiming bonus depreciation for 2011 and 2012. Taxpayers can elect to forgo bonus depreciation and claim a refundable credit. The prior limits of 6% of the amount of cumulative credits not to exceed $30 million have also been eliminated.

Section 179 Expensing
The dollar and investment limits under Section 179 have been continually increased to encourage business spending. As recently as September, pursuant to the Small Business Jobs Act, the Section 179 dollar limits were increased to $500,000 (expense) and $2 million (investment limit) for years 2010 and 2011. While the Act extends this provision of the Internal Revenue Code Section, it does not maintain the very generous limitations of 2010 and 2011. The Act modifies the expensing limits for years beginning in 2012 to a $125,000 dollar expense limit and a $500,000 investment limit. Without this change, the limits would revert to $25,000/$200,000 beginning in 2012.

Research and Development Tax Credit
The Research Credit, which had expired at the end of 2009, has been retroactively extended for two years through December 31, 2011. The President has been urging Congress to make this Credit permanent, but a 2 year extension was enacted.

Small Business Capital Gains
The Small Business Jobs Act expanded the exclusion of gain from qualified business stock to 100% for stock acquired between September 27, 2010 and January 1, 2011. Qualified stock must be original issue stock and held more than five years. The 100% exclusion has been extended to stock acquired before January 1, 2012.

Transit Benefits
The $230 employer provided transit benefits have been extended through the end of 2011.

Work Opportunity Tax Credit (WOTC)
The WOTC is intended to encourage employers to hire individuals from certain targeted groups. The credit, which is based on 40% of up to $6,000 of a targeted employee’s wages, was set to expire August 31, 2011, this credit has been extended to December 31, 2011.

Business Extenders
The Act extends several expired business provisions for two years, 2010 and 2011. Extended incentives include:

  • Indian Employment Tax Credit
  • New Markets Tax Credits
  • Mine Rescue Team Training Credit
  • 15 Year Recovery period for qualified leasehold improvements, restaurant and retail improvements
  • Seven year cost recovery for motorsports entertainment complexes
  • Film and television production costs
  • Five year write off for farm machinery
  • Tax incentives for empowerment zones
  • Employer wage credit for active duty employees

Energy Incentives
The popular energy incentives for individuals who make energy efficient improvements to principal residences such as furnaces, windows, insulation, water heaters, etc., was set to expire at the end of 2010. This provision has been extended to 2011, but provides a 10% credit rather than the more generous 30% credit and will also impose lower credit maximum limits.
Many other business energy incentives were extended and include:

  • Credit for biodiesel fuel
  • New energy efficient home credit
  • Grants for certain energy property instead of credits
  • Energy efficient appliance credit extended but the qualifications are tightened
  • Extended construction start dates for projects eligible for grants equal to 30% of the basis of energy property (Section 1603 Grants)
  • Certain alternative fuel credits and incentives for biodiesel fuels were extended.

Disaster Relief
The Act extends certain disaster relief measures which include:

  • NYC Liberty Zone
  • Various  GO Zone Credits

Bonds
While the Act does extend several bond programs into 2012, such as private activity bonds for qualified educational facilities, the Build America Bond Program was not extended.

Charity Incentives
The following enhanced Charity incentives were also extended:

  • Charitable deduction for contributions of food inventory
  • Charitable deduction for C corporations for donations of books
  • Basis adjustment to S corporation stock for charitable contributions of property
  • Charitable deduction for corporate contributions of computer equipment to be used for education.

Estate and Gift Tax Provisions
For decedents dying in 2010, the estate tax was abolished. It was scheduled to be revived at 55% after 2010. The Act has made some significant modifications to, not only the estate tax, but to gift and generation skipping transfer taxes.

The Act imposes a maximum estate tax rate of 35% with a $5 million exclusion ($10 million per married couple) for decedents dying after January 1, 2011 and before December 31, 2012. The exclusion amount is to be adjusted for inflation.

The Act also maintains a traditional stepped up basis rule for all assets included in a gross estate for decedents dying after January 1, 2011 and before December 31, 2012. Prior to the Act passing, the stepped up rules were replaced with modified carry over basis.

The Act provides that estates of decedents dying during 2010, may elect to apply either the carry over basis rule or the stepped up basis rule. Estates of decedents dying in 2010 may choose between (a) estate tax based on $5 million exemption and 35% rate and a stepped up basis or (b) no estate tax and a modified carry over basis.

The Act allows a surviving spouse to elect to use the unused portion of the estate tax exclusion of a deceased spouse (who passed away after 2010), which provides the surviving spouse a larger exclusion. This is known as portability which will remain available until the end of 2012.
The Act allows estates of decedents dying after December 31, 2009, and up to the date of enactment, nine months to file returns and make payments.

Under the Act, the Gift tax is retained and will be subject to a top rate of 35% with a $5 million exclusion for two years through December 31, 2012. The Act reunifies the Gift and Estate taxes for gifts made after December 31, 2010. Before this change, each tax type had a separate exclusion amount.

Under current law, the Generation Skipping Tax (GST) did not apply for year 2010. The Act revives the GST for 2011 and 2012 with a 35% rate and $5 million exclusion.
Other Estate/Gift Tax provisions include the following extenders:

  • Deduction for qualified family owned businesses
  • State death tax deduction
  • Relief for missed allocations of GST exemption

The above summary covers the major provisions within this very important and complex law. Should you have any questions related to this Act and how it may affect you at year end or during the next few years, please contact your Marcum professional.

If you have any questions on how these change in rates will affect you or your business, please contact your Marcum Tax professional.
 
Joseph Perry, Long Island
joseph.perry@marcumllp.com
631-414-4510

Diane Giordano, Long Island
diane.giordano@marcumllp.com
631-414-4532

Keith Balla, New Jersey
keith.balla@marcumllp.com
973-287-0845

Barry Fischman, Connecticut
barry.fischman@marcumllp.com
203-401-2110

 Alan Griffith, California
alan.griffith@marcumllp.com
310-432-7407

Douglas Farrington, Massachusetts
douglas.farrington@marcumllp.com
617-624-0528

Jeff Winkleman, Pennsylvania
jeff.winkleman@marcumllp.com
610-784-0101

Michele Lipson, Florida
michele.lipson@marcumllp.com
305-995-9600
A special thanks to article contributor Diane Giordano

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