CAE CPA, Accounting and Taxes

Highlights of 2010 Tax Legislation (The "Tax Relief Act") – Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

On December 17, 2010, President Obama signed the Tax Relief Act. The following is a summary of the key provisions of this significant legislation:

• Ordinary Rates - The Tax Relief Act continues all current ordinary individual income tax rates for 2011 and 2012 (including the current income tax rates for estates and trusts).
• Gains and Dividends – The Tax Relief Act continues the current 0% and 15% tax rates for long-term capital gains and qualified dividends for 2011 and 2012.
• Alternative Minimum Tax ("AMT") – On January 1, 2010, the AMT exception amount for individuals filing jointly dropped to $45,000. The exemption amounts for single individuals dropped to $33,750. The Tax Relief Act provides that for 2010 the AMT exemption amounts are increased to $72,450 on joint returns and $47,450 for single individuals. In addition, the Act provides that for 2011, the AMT exemption amounts will be $74,450 on joint returns and $48,450 for single individuals. Also, the Act continues to allow nonrefundable personal credits to reduce AMT for 2010 and 2011.
• No Phase-Outs of Itemized Deductions Until 2013 (§68) – The 3% of AGI phase-out of Schedule A itemized deductions was repealed for 2010, but, was to be reinstated after 2010. The Act provides that there will be no 3% of Adjusted Gross Income ("AGI") phase-out of itemized deductions through 2012.
• Phase-Out of Personal Exemptions Until 2013 (§151(d)(3)) – The rule reducing personal exemptions by 2% for each $2,500 or part of $2,500 of AGI in excess of a specified threshold amount was repealed for 2010, but was to be reinstated on January 1, 2011. However, the Tax Relief Act continues the repeal of the phase-out rule through 2012.
• Child Credit (§24) – The child credit was to be reduced from a maximum of $1,000 to a maximum of $500 beginning in 2011. The Act provides that there will be no reduction or other changes to child credit through 2012.
• Marriage Penalty – For 2010, the size of the 15% bracket for joint return filers is twice the size of the 15% bracket for single individuals. In addition, the amount of the standard deduction on a joint return is twice the size of the standard deduction for single individuals. The size of the 15% bracket on a joint return and the amount of the standard deduction on a joint return will remain increased through 2012.
• Coverdell Education Savings Accounts (§530) – For Coverdell education savings accounts ("CESA"), several substantive provisions were scheduled to change for tax years beginning after 2010, including: 1) the annual contribution limit was to revert to $500 (from $2,000), 2) the AGI ceilings for eligible contributors were to once again reflect a marriage penalty, 3) tuition, room and board, etc. for elementary and secondary schools was to no longer be eligible for payment (tax-free) from the CESA, and 4) contributions for a taxable year after 2010 were to be required to be made by December 31st of that year (not by the following April 15th). The Tax Relief Act delays these changes until 2013.
• Student Loan Interest (§221) – For the student loan interest deduction, several substantive provisions were scheduled to change for tax years beginning after 2010, including: 1) the deduction would not apply to interest payments paid after the first 60 months of payments, and 2) the deduction would phase out at lower AGI levels. The Act delays these changes until 2013.
• American Opportunity Credit (§25A) – The American Opportunity Credit (previously the HOPE credit) was enhanced for 2009 and 2010. The enhancements include an increase in the maximum credit from $1,800 to $2,500, allowing the credit for up to 4 years rather than 2 years, and making up to 40% of the credit refundable. The Act continues these enhancements through 2012.
• Employer-Provided Educational Assistance (§127) – The provisions of §127 allowing an employer to provide tax-free education benefits of up to $5,250 a year to employees was to expire after 2010. However, the Act extends the current $5,250 exclusion rules of §127 through 2012.
• §168(k) Up-Front Deduction (§168(k)) – For Property Acquired and Placed in Service After 9/08/10 and before 2012, the up-front §168(k) depreciation deduction is increased to 100%. In addition, the §168(k) deduction for property placed in service in calendar year 2012 is 50%. Also, the $8,000 §168(k) depreciation amount allowed for autos, trucks and vans subject to the §280F depreciation limitations (those vehicles with a rated weight of 6,000 lbs or less) is continued through 2012. Tax Tip. Qualifying property that is "acquired" after September 8, 2010 pursuant to a binding contract entered into before September 9, 2010 will still qualify for the 100% bonus depreciation, provided that the binding contract was entered into after 2007 and the property is placed in service by December 31, 2011.
• Election For Corporations to Swap §168(k) Up-Front Depreciation For Refundable AMT Credits (§168(k)(4)) – This Act allows an election under §168(k)(4) for C corporations to treat up to 6% of their pre 2006 unused AMT credits as refundable credits in return for giving up the §168(k) deduction and taking straight-line deprecation on qualifying §168(k) property. This provision applies to property placed in service after 2010 and before 2013.
• Extension of the Increased §179 Deduction. As 2010 started, the §179 deduction was limited to $250,000, and was reduced by the amount that the §179 property acquisitions exceeded $800,000. For property placed-in-service in tax years beginning in 2010 and 2011, the previously-enacted Jobs Act of 2010 (Jobs Act) increased this cap from $250,000 to $500,000, and also increased the beginning phase-out threshold from $800,000 to $2,000,000. In addition, for 2010 and 2011 purchases, the Jobs Act temporarily expanded the §179 deduction to include "qualified real property." The maximum §179 deduction cap was scheduled to drop back to $25,000 for tax years beginning after 2011. The Tax Relief Act provides that the §179 deduction cap will drop to $125,000 (with a phase-out threshold for purchases beginning at $500,000) for tax years beginning in 2012 (the cap drops to $25,000 for tax years beginning after 2012). Planning Alert! The Tax Relief Act does not extend the temporary §179 deduction for "qualified real property" beyond its current expiration date that ends after 2011.
• SUVs over 6,000 Lbs. SUVs with loaded vehicle weights over 6,000 lbs, although exempt from the annual depreciation limits that generally apply to passenger autos, are limited to a §179 deduction of $25,000 (instead of $500,000 for 2010 and 2011). However, unlike SUVs, pickup trucks with loaded vehicle weights over 6,000 lbs are not subject to the $25,000 limit imposed on SUVs, if the truck bed is at least six feet long. Thus, a qualifying SUV purchased in 2010 but before September 9, 2010 will have a different deduction limit than if it were purchased after September 8, 2010. For example, if a new SUV weighing over 6,000 lbs, costing $50,000 and used entirely for business is placed-in-service during 2010 and before September 9, 2010: 1) up to $25,000 of the cost could be deducted immediately under §179, 2) 50% of the remaining balance could be claimed as §168(k) depreciation, and 3) 20% of the remaining basis could generally be taken as regular MACRS depreciation for the first year. By contrast, if the same SUV were acquired and placed in service after September 8, 2010 (and before 2012), the entire $50,000 cost could be deducted up front.
• §179 Deduction And 100% Bonus Depreciation Applying To The Same Property. In many situations, new depreciable property with a depreciable life of 20 years or less (including "qualified leasehold improvements") will qualify for both the §179 deduction and the 100% up-front depreciation deduction, if acquired and placed in service after September 8, 2010 and before 2012. It might be assumed that the 100% §168(k) depreciation deduction would generally be preferable to §179 deduction because, unlike the §179 deduction, the up-front depreciation deduction is not limited by the business taxable income. Therefore, the 100% §168(k) depreciation deduction can create a net operating loss (which may be carried back to prior years). Pointer! In certain situations, the election to take the §179 deduction may still be advisable even for property that qualifies for the 100% up-front depreciation deduction. For instance, many states require an add back to the §168(k) depreciation deduction while allowing the §179 deduction.
• Exclusion For Qualified Small Business Stock (§1202 Stock). The 2010 Jobs Act, passed last September, increased the gain exclusion for Qualified Small Business Stock (QSBS) from 75% to 100% for stock purchased after September 27, 2010 and before 2011. The Tax Relief Act provides that the 100% gain exclusion applies to qualifying §1202 QSBS purchased after September 27, 2010 and before 2012. Note! To qualify for the QSBS exclusion, the stock must be held for more than 5 years.
• Estate Tax Relief – The Tax Relief Act makes several changes to the estate, gift and generation-skipping taxes for 2010, 2011, & 2012.
  • Estate Tax Exemption Amount And Rates – The Act provides a maximum estate tax rate of 35% and a $5,000,000 exemption amount for estates of individuals dying in 2010, 2011, and 2012. The $5,000,000 exemption amount will be indexed for inflation in 2012. Planning Alert! Absent future legislation, for estates of decedents who die after 2012, the exemption amount will revert to $1 million, and the top tax rate of 55% will be reinstated.
  • Election For Estates of Individuals Dying In 2010 – Estates of Individuals dying in 2010 may choose: 1) To apply the estate tax rules for 2010 in effect prior to the enactment of the Tax Relief Act. These Pre-Act rules provide for no estate tax. However, the modified carryover basis rules will apply to assets received by the heirs, OR 2) To apply the new $5,000,000 exemption amount and a 35% estate tax rate on the value of the estate in excess of $5,000,000. If this option is chosen, the estate tax rules applicable prior to 2010 will generally apply. For example, the basis of the heirs in assets received from the estate will generally be the fair market value of the assets on the date of death. In addition, any capital gain assets received from the decedent will automatically be assumed to be held for more than one year and will produce a long-term capital gain upon sale.
  • Unused $5,000,000 For One Spouse May Be Used By Surviving Spouse – For individuals dying in 2011 or 2012, the executor of a deceased spouse’s estate may elect for the $5,000,000 exemption amount not used by the estate of the first spouse to die to be used by the estate of the surviving spouse. Planning Alert! This provision will benefit estates where the value of the estate of the first spouse to die is less than the $5,000,000 exemption amount and the value of the estate of the surviving spouse is more than the exemption amount. In addition, this provision reduces the need to unified credit shelter trusts. However, credit shelter trusts may still be beneficial for keeping future appreciation out of the surviving spouse’s estate. Idea! Any unused exemption amount transferred to the surviving spouse may be used to reduce the gift tax during the surviving spouses life or used to reduce the estate tax upon the surviving spouses death.
  • Gift Tax – For 2010, the exemption amount for gifts remains at $1,000,000 and the maximum gift tax rate remains at 35%. However, effective for gifts made in 2011 and 2012, the Act unifies the $5,000,000 estate exemption amount with the gift tax. In other words, the $5,000,000 exemption amount is available to reduce the gift tax during life and any unused amount of the $5,000,000 exemption is available to be used for estate tax purposes at death.
  • Generation-Skipping Tax – The generation-skipping tax is restored retroactively to January 1, 2010. However, the Act also provides a $5,000,000 exemption for 2010, 2011, and 2012 from the generation-skipping tax (reduced by any generation-skipping exemption amount used before 2010). The $5,000,000 will be indexed for inflation for 2012. If the generation-skipping gifts exceed the $5,000,000 lifetime generation-skipping exemption, the tax rate for generation-skipping gifts made in 2010 will be zero. However, any generation-skipping gifts in excess of the lifetime $5,000,000 exemption amount made after 2010 will be subject to a 35% generation-skipping tax.
  • Due Dates for Elections And Filing Various Returns. An election to apply the Pre-Act rules for the estate of the decedent who died in 2010 will not be due earlier than nine months following December 17, 2010. In addition, 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 "qualified" disclaimer of an interest in property passing by reason of the decedent’s death, also may not be earlier than the date which is nine months after December 17, 2010. Furthermore, the Tax Relief Act provides that, for generation-skipping transfers made after 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) may not be earlier than the date which is nine months after December 17, 2010.
• 2% Reduction in OASDI – Effective for 2011 only, an employee’s OASDI tax is reduced from 6.2% to 4.2% and a self-employed individual’s OASDI is reduced from 12.4% to 10.4%. The maximum savings from this reduction is $2,136 (106,800 x .02). In addition, The Tax Relief Act provides that self-employed individuals will be allowed to deduct 59.6% (instead of the normal 50%) of the OASDI tax from their taxable income. This, in essence, allows a deduction for the unreduced half of the OASDI. Self-employed individuals will continue to deduct 50% of the Medicare portion of the S/E tax (i.e., the 2.9% portion of the S/E tax). Therefore, the total S/E tax rate for 2011 will be 13.3% rather than 15.3%. The deductible portion will be 59.6% of the 10.4% OASDI or 6.2% of S/E income and 50% of the 2.9% Medicare Tax or 1.45% of S/E income. Therefore, a deduction is generally allowed for 7.65% of S/E income up to $106,800.
• Selected Tax Provisions Extended Through 2011 – Generally, the tax provisions that expired after 2009 and that have been routinely extended in the past, have been extended by the Act through 2011. The following are selected provisions extended through 2011.
  • Selected "Individual" Tax Provisions Extended Through 2011 – 1) school teachers’ deduction (up to $250) for certain school supplies; 2) election to deduct state and local sales tax; 3) deduction (up to $4,000) for qualified higher education expenses; 4) expanded deduction and carry over limits for charitable contributions of conservation easements; 5) deduction for mortgage insurance premiums as qualified residence interest; 6) D.C. first time homebuyer’s credit; 7) qualifying tax-free transfers from IRAs to charities of up to $100,000 for those at least 70 1/2, and 8) credit for energy-efficient improvements to a principal residence. Planning Alert! This 30% credit of up to $1,500 (maximum limitation for 2009 and 2010 combined) drops to 10% with a life-time cap of $500 for installations after December 31, 2010.
• Selected "Business" Tax Provisions Extended Through 2011 – 1) 15-year (instead of 39-year) depreciation period for "qualified" leasehold improvements, restaurant property, and retail improvement property; 2) 7-year depreciation period for certain motor sports racetrack property; 3) research and development credit; 4) employer differential wage credit for payments to military personnel; 5) various tax incentives for investing in the District of Columbia; 6) favorable S corporation charitable contribution provisions; 7) temporary exclusion of 100% of gain on the sale of certain qualified small business stock; 8) a host of tax benefits for qualified energy-efficient expenditures; 9) enhanced charitable contribution rules for qualifying business entities contributing computer equipment, book, and food inventory; and 10) the work opportunity tax credit for qualified employees who begin work through December 31, 2011.
• Selected Tax Provisions Extended Through 2012. The Tax Relief Act extends through 2012 several provisions that were scheduled to expire after 2012. The following are selected provisions extended through 2012. 1) the $2,000 contribution limitation, etc. for Coverdell education savings accounts; 2) the higher AGI levels, etc. for the student loan interest deduction; 3) the enhanced earned income tax credit; 4) the higher $1,000 child credit; 5) the higher limitations for the child and dependent care credit; 6) the maximum $2,500 American Opportunity Tax credit (formerly the "Hope" credit); and 7) the expanded rules for tax-free treatment of scholarships under the NHSC Scholarship Program and the Armed Forces Scholarship Program.
• Selected "Business" Tax Provisions Extended Through 2012 – 1) the election for C corps to exchange bonus depreciation for refundable AMT credits; 2) tax-free employer-provided education assistance; 3) the credit for employer-provided child-care facilities; and 4) continuing the accumulated earnings and personal holding company tax rates at 15%.
• Selected Tax Breaks That Expired After 2009 and Were Not Extended – 1) additional standard deduction for real property taxes; 2) temporary sales tax deduction paid on the purchase of new vehicles; 3) waiver of minimum required distributions from IRAs, etc. 4) $250 economic recovery payment to recipients of Social Security or veteran’s benefits; 5) $250 payment for government retirees; 6) 90% of prior years tax liability estimated tax relief; 7) $2,400 exclusion for unemployment benefits; and 8) extended 5-year NOL carry-back period.
• Selected Tax Breaks That Expire After 2010 and Were Not Extended – 1) first-time homebuyer’s credit (expired during 2010); 2) employer’s exemption from paying the 6.2% Social Security tax on hiring a qualified unemployed worker; 3) "making work pay" credit; 4) expansion of the work opportunity credit (WOTC) to the hiring of "unemployed veterans" and "disconnected youth"; 5) income exclusions for certain state and local tax benefits granted to members of qualified emergency response organization; 6) tax-free payments from §529 plans for computer-related equipment and services; 7) $10,000 (instead of $5,000) up-front deduction for "start-up expenses"; 8) 5-year (instead of 1-year) carry back for qualified general business credits and allowing AMT offset; 9) deferral and ratable inclusion for qualifying business cancellation of debt (COD) income under §108(i); 10) 5-year amortization of music copyrights; 11) treating natural gas lines as 15-year property; 12) authority to issue "Build America Bonds"; and 13) deduction of health insurance premiums for self-employment (SECA) tax purposes.