House Passes Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010
Just before midnight on Thursday, December 16, 2010, the House approved the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853) by a margin of 277 to 148. The measure passed in the Senate on December 15, 2010, by a margin of 81 to 19, and was signed into law by President Obama today.
Under this bill, individual taxpayers can expect significant tax advantages, including:
- Extension of the Bush-era tax rates for taxpayers at all income levels through 2012.
- Two percentage-point cut in employee-paid Social Security payroll taxes for one year, from 6.2% to 4.2%. This provision alone is estimated to inject $120 billion into the U.S. economy, but is only in effect for 2011. The cut is available to all wage earners, regardless of income level, but the employer’s share of payroll taxes remains at 6.2%. Self-employment taxes are cut from 12.4% to 10.4%.
- Extension of 15% tax cap on long term capital gains and qualified dividends through 2012. Without any action, the maximum rate on net capital gain was scheduled to rise to 20% in 2011, and the rate on all dividends was scheduled to rise to the rates on regular income, which could have been as high as 39.6%.
- Extended repeal of the limitation on deductions for high-income taxpayers through 2012. Without any action, high-income taxpayers’ allowable deductions would be reduced at a projected level of income starting at $169,550.
- Extension of marriage penalty relief, the $1,000 child tax credit and the dependent care credit through 2012.
- Extension of the Alternative Minimum Tax “patch,” providing higher exemption amounts for 2010 and 2011. Without any action, the exemption amounts for 2010 would fall, subjecting an estimated 21 million additional households to the tax.
- For 2011, a reinstated estate tax with an exemption amount of $5 million per individual with a top rate of 35%. For 2012, the exemption amount is indexed to inflation, but the top rate remains at 35%. Without any action, the estate tax exemption amount for 2011 would have been $1 million with a top rate of 55%.
- In 2011 and 2012, a surviving spouse may elect to take advantage of the unused portion of the exemption amount of his or her predeceased spouse, so married couples can effectively shield $10 million of their assets from transfer taxes.
- Estates of decedents dying in 2010 may elect to apply the current estate tax regime with no estate tax and carryover basis rules, or may instead opt in to the new 2011 estate tax regime with a $5 million exemption and unlimited step up in basis.
- For 2011 and 2012, the gift and estate tax exemption will be reunified, which means that the $5 million exemption amount will be available for gifts made in 2011 and is indexed for inflation in 2012. The law in effect prior to 2010 provided a $3.5 million lifetime exemption for estates, but only $1 million for gifts. The gift tax rate for gifts made in 2011 and 2012 will be 35%.
- The exemption from the generation-skipping tax (GST) rises to $5 million for 2011 and will be indexed for inflation in 2012. The GST tax rate for generation-skipping transfers made in 2011 and 2012 will be 35%.
Businesses can also expect to gain tax advantages for the next year or two, including the following:
- Extension of certain important U.S. foreign tax rules through 2012, including:
- Favorable treatment under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) for mutual funds holding U.S. real property;
- Certain exceptions to Subpart F for controlled foreign corporations (CFCs) with active financing income; and
- Look-through treatment under Subpart F for CFCs receiving certain payments from related parties.
- 100% bonus depreciation for qualified investments made on or after September 9, 2010 and on or before December 31, 2011. Bonus depreciation of 50% will be available for property placed in service after December 31, 2011 and on or before December 31, 2012.
- Section 179 business expense dollar and investment limits will be set at $125,000 and $500,000, respectively, for tax years beginning in 2012.
- Retroactive extension of the research tax credit through 2011.
- Extension of the look-through treatment of payments between controlled foreign corporations through 2012.
The measure is anticipated to inject over $800 billion into the U.S. economy and to create some certainty in tax planning for the short-term. However, predictability problems will likely arise again in 2011 and 2012, when many of these provisions are set to expire and policy makers prepare for 2012 elections.
If you would like further information with respect to this legislation, please contact any of the attorneys in our Tax Practice Group: Paul A. Iannone (firstname.lastname@example.org), Thomas M. Divine (email@example.com) or Monique R. Polidoro (firstname.lastname@example.org).
IRS Circular 230 Notice: Any tax advice provided herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on any taxpayer.
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