On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Act). This legislation extends many of the tax breaks originally enacted under the Bush administration. There are very significant changes related to individual income tax and estate and gift tax, including certain provisions related to the alternative minimum tax (AMT) and generation-skipping transfer taxes. Outlined below are a few of the main points.
Estate, Gift and Generational Skipping Transfer Tax
Under the prior law, for decedents dying in 2010, there was no estate tax applicable; however, the tax basis of the assets to the heirs was subject to modified carryover basis rules. Additionally, on January 1, 2011 the sunset provisions provided that estates in excess of $1,000,000 would be subject to estate tax. The Act raises the estate tax exemption threshold to $5 million and sets the effective top rate at 35% for estates, gifts and generational skipping tax. Under the Act, for estates where the decedent died in 2010, the executor may elect to choose either (i) the modified carryover basis for 2010 or (ii) the $5 million exemption tax formula. The exemption amount is indexed for inflation beginning in 2012.
The Act also provides for portability between spouses for any unused portion of the estate tax exclusion amount from the estate of the first spouse to die. This significant provision provides unique planning opportunities as any unused exemption for the predeceased spouse is available to the surviving spouse if timely elections are made.
The gift tax has now been reunified with the estate tax. Individuals can now gift during 2011and 2012 up to $5 million during their lifetime without incurring gift tax. Annual gift tax exclusions for 2011 remain at $13,000.
The estate, gift and generational skipping transfer tax provisions are effective through 2012. Hopefully Congress will extend these provisions and make them permanent, but as we have learned over the past few years, that is not certain.
Income Taxes: Two-YearExtension of all Current Tax Rates Through 2012
Under prior law, the individual income tax rates had been scheduled to revert from their current levels to the levels prior to the Bush tax cuts. Under the Act, the income tax rates remain at 10, 25, 28, 33, and 35 percent. The Act also extends for two years the 15 percent rate for capital gains & dividends (zero percent for those in the 10 and 15% income tax brackets).
Under the legislation, there is a 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease). Various credits such as the child tax, earned income, adoption and dependent care credits are also extended. The “so-called” marriage penalty relief has been extended under the Act.
AMT Patch for 2010 and 2011
The 2009 Alternative Minimum Tax provisions that removed an estimated 21 million households from being subject to AMT were continued under the Act. The Act increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly). It also allows nonrefundable personal credits against the AMT.
Small Business Provisions; Temporary Employee Payroll Tax Cut
The Act provides a reduction in the employee’s share of payroll taxes. The employee share of the OASDI portion of Social Security taxes has been reduced 2% on wages and self-employment income earned up to $106,800.
Businesses may also take advantage of some business incentives. Among other things, bonus depreciation has been raised from 50% to 100% for qualified investments made after September 8, 2010 to January 1, 2012. The Small Business Jobs and Credit Act of 2010 that was signed into law in September, provides additional tax depreciation bonuses through 2011 to businesses buying equipment and vehicles and making qualified real property improvements.
Continuation of “Tax Extenders” for 2010 and 2011
Several tax extenders were implemented through 2011 including the following:
- Tax-free distributions of up to $100,000 from IRA plans for qualified charitable purposes
- Above-the-line deduction for qualified tuition and related expenses
- Expanded Coverdell Accounts and definition of education expenses
- American Opportunity Tax Credit for tuition expenses of up to $2,500
- Deduction of state and local general sales taxes
- 30-percent credit for energy-efficiency improvements to the home
- Exclusion of qualified small business capital gains
The estimated cost of the tax package in the Act is $800 million, and most provisions expire in 2012. Over the next two years we have several unique estate and gift tax provisions that may benefit many of our clients. You may consider a review of your estate planning documents and strategies as they relate to the provisions enacted under the Act and also for non-tax reasons. If you would like us to undertake this representation and review, please contact Sandy Clark at (919) 787-8880 or firstname.lastname@example.org.
Sandra M. Clark is an attorney at the law firm of Manning Fulton & Skinner, P.A. with a diversified tax, business, estate planning and probate practice. Sandy advises individuals on matters involving complex tax-saving wealth transfer strategies and estate and trust administration issues. She is also experienced in the area of estate litigation. Sandy counsels private closely held companies, franchisors, and franchisees on various corporate and business matters. She is a licensed certified public accountant and board certified specialist in estate planning and probate law.