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President Obama Signs Bill to Extend Bush Era Tax Cuts and Business Incentives
December 20, 2010
On December 17, 2010, President Obama signed into law The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act"). The Act provides a two-year extension of existing individual income, capital gains and dividend tax rates scheduled to expire at the end of 2010 and provides estate tax guidance. The Act also extends certain business tax credits and incentives that expired or were to expire at the end of 2010. The Act does not include any income tax revenue raising offsets. The following is a summary of some of the significant provisions contained in the Act.
Extension of Individual Income Tax Rates and Estate Tax Guidance
(a) Individual Rates and Exemptions
The Act extends, until January 1, 2013, the maximum tax rate imposed on individuals’ income (35%), long-term capital gains (15%) and qualified dividends (15%). The limited marriage penalty relief is also extended for an additional two years so that married taxpayers filing a joint income tax return will continue to: (i) be allowed a standard deduction that is 200% of the standard deduction for single filers and (ii) have double the amount of income as single filers subject to tax at the 15% rate. Additionally, the Act limits the number of taxpayers subject to the alternative minimum tax by raising exemption levels for 2010 and 2011.
(b) Estate Tax Guidance
Prior to the passage of the Act, the estates of decedents who died in 2010 were not subject to the estate tax and their heirs received the assets of the estate with a modified carry over tax basis. The Act reinstates the estate tax for 2010, 2011 and 2012, at a maximum rate of 35%, and provides an exemption for estates of $5 million or less. Under the Act, estates of decedents dying in 2010 can elect to either: (i) not be subject to the estate tax and follow the modified carry over tax basis rules with respect to the estate's assets, or (ii) be subject to the estate tax and obtain a fair market value tax basis with respect to the estate’s assets.
For a more detailed discussion of the estate tax provisions, click here.
Reinstated Tax Incentives for Businesses
The Act extends several business and energy tax relief provisions that were to expire on December 31, 2010, and restores many of the business tax credits and incentives that expired on December 31, 2009 by retroactively reinstating such provisions through the end of 2011. Provisions extended under the Act include:
(a) the research and experimentation credit;
(b) the new markets tax credit;
(c) the election to expense qualified environmental remediation costs;
(d) the active financing exception under Subpart F of the Code;
(e) the exclusion of gain on certain qualified small business stock;
(f) tax credits and outlay payments for ethanol;
(g) cash grants for specified energy property in lieu of tax credits; and
(h) suspension of the taxable income limit for purposes of depleting marginal wells.
The Act generally extends the 50% "bonus" depreciation allowance for property placed in service after December 31, 2011 and before January 1, 2013. In addition, the Act permits 100% “bonus” depreciation for property acquired and placed in service after September 8, 2010 and before January 1, 2012. Also, businesses may elect to increase their alternative minimum tax credit limitation instead of claiming “bonus” depreciation for property placed in service in 2011 and 2012.
Employee Payroll Tax Holiday
The Act provides for a reduction in the employee portion of the Social Security payroll tax from 6.2% to 4.2% of wages up to $106,800 earned during the 2011 calendar year. Individuals who are self employed will be subject to tax at a rate of 10.4% on their self employment income up to $106,800 earned during the 2011 rather than the current rate of 12.4%.
The Act avoids a significant increase in income tax rates at a time when the additional burden on taxpayers could have strained the recovery of the U.S. economy. As a result of the passage of the Act, taxpayers can better predict their federal tax liability in 2011 and 2012, which may favorably impact their short term investment decisions. However, the certainty provided by the Act is limited and the Republicans and Democrats will, very shortly, need to address whether to enact additional short term extensions of the provisions covered by the Act or pursue more comprehensive tax reform.
IRS Circular 230 Disclosure: As required by United States Treasury Regulations, you should be aware that this communication is not intended or written by the drafter to be used, and it cannot be used, by any recipient for the purpose of avoiding penalties that may be imposed on the recipient under United States federal tax laws.