New Tax Relief Legislation

In a bipartisan agreement, Congress has passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act 0f 2010.  This legislation extends for up to 2 years many tax cuts that had either expired or were scheduled to expire.  In addition this law enacts a number of new tax benefits.

Some of the key provisions are summarized as follows:

INDIVIDUAL RELIEF

Tax rates - The current tax rates and brackets ranging from 10% - 35% have been extended through 2012.

Long Term Capital gains and qualified dividends - the reduced favorable rates ranging from 0% - 15% have been extended through 2012.

Itemized deductions and personal exemptions - for 2010 through 2012 personal exemptions and itemized deductions for higher income taxpayers will not be subject to a reduction based on adjusted gross income.

American Opportunity Tax Credit - This credit of up to $2,500 per eligible student per year (subject to an income based phase out) for qualified post-secondary education expenses is extended through 2012.

Qualified higher education expenses - above the line deduction for tuition and related expenses up to maximum of $4,000 (subject to an income based phase out) for which no education credit was elected.  This has been extended through 2011.

Sales tax deduction - the itemized deduction for sales taxes, in lieu of state and local income taxes, had expired as of 2009.  It has now been extended through 2011.

IRA tax free distribution to charities - extended to cover 2010 and 2011 qualified distributions by persons over age 70-1/2. A qualified charitable distribution may count towards the minimum required distribution. The maximum eligible amount is $100,000 per year. No charitable itemized deduction is allowed for these charitable distributions. 

A special rule allows an election to treat qualified charitable distributions in January 2011 as if made in 2010.  This would count both for the 2010 (rather than 2011) $100,000 limitation and for the 2010 required minimum distribution. 

Note that the following are not qualified for IRA charitable distributions: 1) donor advised funds and 2) private foundations, unless they elect to pay out 100% of the IRA contribution (in addition to their regular distributions) within 2-1/2 months of the close of that year.

Alternative minimum tax exemption - the AMT exemptions have been increased and extended through 2011.

Credit for qualified energy efficient home improvements  - extended through 2011 but at a reduced maximum total lifetime credit of $500

A number of other deductions, exclusions and credits have been extended through 2012.  As noted, some of these are subject to phase outs or reductions for higher income taxpayers.  These include: 

Exclusion from income for up to $5,250 of employer provided educational assistance,
Deduction of up to $2,500 for student loan interest - subject to phase out,
Allowable contribution of up to $2,000 to education savings accounts for children under age 18 - subject to phase out,
Child tax credit of up to $1,000 per child - subject to phase out
Increased Dependent care credit - 35% up to $1,050 for one, or $2,100 for two or more eligible children - subject to reduction.
Qualified expenses of elementary and secondary school teacher - up to $250 annually - extended through 2011.

PAYROLL TAX RELIEF

For calendar year 2011 the employee's portion of the social security taxes, and self employed individual's self employment tax, will be reduced by 2 percentage points (2 percent of their social security wages).

BUSINESS RELIEF

Bonus Depreciation - 100% of qualified business purchases of new depreciable assets, including qualified leasehold improvements, may be expensed - for fixed assets purchased from September 9, 2010 through December 31, 2011.  50% first year bonus depreciation will apply to purchases in calendar 2012.

15 Year straight line depreciation  - for qualified leasehold improvements, qualified restaurant real property, and qualified retail improvements (normally subject to a 39 year depreciable life).  This has been extended for property placed in service through December 31, 2011.

Work Opportunity Tax Credit - a credit of 40% of qualified wages - has been extended to cover hires through December 31, 2011.

Various business credits, which had expired in 2009, have been extended through 2011.  These include (among others not listed below):

Credit for biodiesel and renewal diesel fuel,
New energy efficient home credit for contractors,
Grant in lieu of credit - for production of electricity from renewable resources,
Grant in lieu of credit - for qualified renewable energy property
Research credit
New Markets tax credit
Enhanced charitable deduction for donations of food inventory.

ESTATE & GIFT TAX PROVISIONS

Estate Tax - Prior to the enactment of the relief act, the federal estate tax and generation skipping tax (GST) were repealed for persons dying in 2010.  In 2011 the estate tax was scheduled to revert to a potential maximum tax of 55% with a $1 million exclusion.  The GST was scheduled to revert to 55% with a $1 million exclusion.  For estates of persons dying in 2010,  the decedent's property would have a carryover basis equal to the lesser of the decedent's basis, or the date of death fair market value;  plus up to a $1.3 million step up in basis, with additional adjustments for certain unused losses of the decedent. 

For 2011 and 2012 the new law provides a maximum estate tax rate of 35% and a $5 million exclusion.  In addition it provides a carryover of any unused portion of the first spouse's $5 million exclusion to the surviving spouse. There are special ordering rules if the surviving spouse remarries. 

The property of the decedent will be stepped up (or down) to the date of death fair market value. Estates of persons dying in 2010 may elect to apply the new law estate tax provisions, or may apply the law prior to the relief act, as noted above. 

The GST exemption is increased to $5 million  for 2010 through 2012, with a 35% tax rate on the excess in 2011 and 2012, and a 0% rate in 2010. As with the estate tax, any unused portion of the first spouse's $5 million GST exemption will be available for the surviving spouse.

Gift Tax - Gifts in 2010 are subject to a lifetime exclusion of $1 million and maximum tax rate of 35%.  Under the new law gifts in 2011 and 2012 are subject to an increased lifetime exclusion of $5 million and the same maximum rate of 35%.