Congress Enacts Tax Cut Extensions

January 1, 2011

Congress in December sent to President Barack Obama for his signature the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, HR 4853, which postpones the sunset of the 2001 and 2003 tax cuts, temporarily reduces the estate tax and extends a number of expired provisions. It also extends unemployment benefits. The act did not address the expanded Form 1099 reporting requirements enacted by the Patient Protection and Affordable Care Act of 2010 and Small Business Jobs Act of 2010. Here are some of the act’s most notable provisions:

 

Extension of EGTRRA tax cuts. In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) introduced a new 10% tax bracket for individuals (below the existing 15% bracket) and reduced the other tax brackets to 25%, 28%, 33% and 35% (from 28%, 31%, 36% and 39.6%). Those changes were scheduled to sunset after 2010, but HR 4853 amends the EGTRRA to postpone that sunset until after 2012. The new law similarly postpones the sunset of provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 by continuing the lowered 15% long-term capital gains tax rate (0% for taxpayers in the 10% and 15% ordinary income tax brackets) and the application of the lower capital gains rates to qualified dividends, which also had been scheduled to expire after 2010.

 

The EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout is also extended by the act for two years.

 

Payroll taxes. For 2011 only, the act reduces the rate for the Social Security portion of payroll taxes to 10.4%, by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remains 6.2%).

 

Alternative minimum tax (AMT) patch. The act includes an AMT patch for 2010 and 2011. For 2010, the AMT exemption amounts are $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. For 2011, the amounts are $48,450 and $74,450, respectively. The act also extends through 2011 the ability to use nonrefundable personal credits to offset the AMT (under IRC § 26(a)).

 

Bonus depreciation and section 179 expensing. The act allows taxpayers to deduct 100% of the cost of business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property). The act also extends the election to accelerate AMT credits in lieu of bonus depreciation through 2012, although property manufactured, constructed or produced during 2010 would not be eligible for the election. The act sets the expensing limitation under IRC § 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. These amounts will then be reduced to $25,000 and $200,000 for tax years beginning after 2012. (Under the Small Business Jobs Act of 2010, for tax years beginning in 2010 and 2011, the expensing limit and phaseout threshold are $500,000 and $2 million, respectively.)

 

Estate, GST and gift taxes. HR 4853 reinstates the estate tax through Dec. 31, 2012, with a top rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011). For estates of decedents dying in 2010 (when, under the EGTRRA, the tax was repealed), an election is available either to be subject to the reinstated estate tax or instead to be subject to the modified carryover basis rule that was in effect in 2010 as part of the estate tax repeal. Estates of decedents dying in 2010 are given an extension to file an estate tax return until nine months after the date of enactment of HR 4853. The act also allows an election on a timely filed estate tax return (for decedents dying after Dec. 31, 2010) to apply any unused portion of the decedent’s exclusion amount to a surviving spouse. The election extends the period of limitation for examination by the IRS of the decedent’s estate tax return “to make determinations with respect to such amount” for purposes of carrying out the provision.

 

The act also reinstates the generation-skipping transfer tax, and the due date for filing a return is extended to nine months after the date of enactment of HR 4853. However, for generation-skipping transfers made during 2010, the tax rate will be zero.

 

The act also restores the unified credit against gift tax for gifts made after 2010.

 

Extension of expired and expiring provisions—individuals. A variety of temporary tax provisions, often referred to as “extenders,” expired at the end of 2009, and more had been scheduled to expire at the end of 2010. They included tax credits, deductions and various tax incentives. The act extends many of these expired and expiring provisions, including for individual taxpayers:

 

  • The increased standard deduction for married taxpayers filing jointly, scheduled to expire after 2010, will continue for two years.
  • The $1,000 child tax credit amount will continue for two years (2011 and 2012), instead of reverting to $500. The act also extends for two years the increased refundability of the credit under the American Recovery and Reinvestment Act of 2009 (15% of earned income over $3,000).
  • The earned income credit’s higher phaseout range and higher credit amount for a third child will continue for two years (2011 and 2012).
  • The $3,000 amount for the child and dependent care credit, which had been scheduled to revert to $2,400 after 2010, will continue for two years.
  • The American opportunity tax credit will continue for two years (2011 and 2012).
  • Taxpayers may elect to claim state and local sales taxes (rather than income taxes) as an itemized deduction in 2010 and 2011.
  • Above-the-line deductions are allowed through 2011 for qualified tuition and related expenses and, for pre-collegiate schoolteachers, certain classroom expenses.
  • Taxpayers may continue through 2011 to make tax-free charitable distributions from their individual retirement plans under section 408(d)(8).

 

Extended business and energy incentives . Unless stated otherwise, these are extended retroactively to 2010 and forward through the end of 2011:

 

  • The temporary 100% exclusion of gain from the sale of certain small business stock under section 1202, enacted by the Small Business Jobs Act of 2010.
  • The section 41 research and development credit.
  • Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
  • The work opportunity credit scheduled to expire Aug. 31, 2011, is extended through Dec. 31, 2011.
  • The section 45L credit for new energy-efficient homes is extended to homes acquired through Dec. 31, 2011.
  • The credit for production of energy-efficient home appliances is extended and modified (IRC § 45M) for appliances produced during 2011.
  • The biodiesel and renewable diesel credit of section 40A.

 

 

A large number of other provisions are also extended. For more details, click here.

 

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