In a highly-anticipated vote, the Senate on December 15, 2010, approved by a 81 to 19 margin, H.R. 4853, the Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010. H.R. 4853, as amended by the Senate, follows through on the framework agreed to on December 6 by President Obama and GOP leaders in Congress. The Senate bill extends the Bush- era individual and capital gains/dividend tax cuts for all taxpayers for two years. The bill also provides for a one-year payroll tax cut, 100 percent bonus depreciation through 2011 and 50 percent bonus depreciation for 2012, extenders relief, an AMT “patch,” a top federal estate tax rate of 35 percent with a $5 million exclusion, and more.
Passage by the Senate is certain to put great pressure on reluctant Democrats in the House to support the bill. Although the margin may be closer in the House, and may possibly include a change to the estate tax compromise that the Senate may then need to approve, a final bill is anticipated before Congress adjourns for the year.
INDIVIDUALS
Individual Tax Rates
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the individual income tax rates are scheduled to revert from 10, 15, 25, 28, 33, and 35 percent to 15, 28, 31, 36, and 39.6 percent after December 31, 2010. The Senate bill extends the 10-percent rate and the other reduced individual income tax rates for two years, through December 31, 2012, for all taxpayers.
Capital Gains/Dividends
Qualified capital gains and dividends currently are taxed at a maximum rate of 15 per- cent (zero percent for taxpayers in the 10 and 15 percent income tax brackets) for 2010. The Senate bill continues this treatment for two years, through December 31, 2012.The Senate bill also provides for treating dividends received from a regulated in- vestment company (RIC), real estate in- vestment trust (REIT) and other qualified pass-through entities as qualified dividends for purposes of the reduced tax rates. Also extended are rules for collapsible corporations, the accumulated earnings tax and personal holding companies.
Itemized Deduction Limitation
The “Pease” limitation (named after the member of Congress who sponsored the bill enacting it) reduces the total amount of a higher-income individual’s otherwise allow- able deductions. The Pease limitation is re- pealed for 2010 but is scheduled to return in full after 2010 under EGTRRA’s sunset rules at a projected level of income starting at $169,550 ($84,775 for married couples filing separately). The Senate bill extends repeal of the Pease limitation for two years, through December 31, 2012.
Personal Exemption Phaseout
Before 2010, taxpayers with incomes over certain thresholds were subject to the personal exemption phaseout (PEP). The PEP reduced the total amount of exemptions that may be claimed by two percent for each $2,500 or portion thereof ($1,250 for married couples filing separate returns) by which the taxpayer’s adjusted gross income (AGI) exceeded the applicable threshold (projected for 2011 to start at $169,550 for singles, $254,350 for joint filers). Under EGTRRA, the PEP is repealed for 2010. The Senate bill extends repeal of the PEP for two years, through December 31, 2012.
Marriage Penalty Relief
EGTRRA provided relief from the so-called marriage penalty by increasing the basic standard deduction for a married couple filing a joint return to twice the amount for a single individual. The Senate bill extends EGTRRA’s marriage penalty relief for two years, through December 31, 2012.
EGTRRA also temporarily expanded the size of the 15 percent income tax rate bracket for married couples filing a joint return to twice that of single filers to help mitigate the marriage penalty. The Senate bill extends this treatment through December 31, 2012.
The Senate bill extends the $1,000 child tax credit for two years, through December 31, 2012. Also extended for two years are enhancements to the credit made in EGTRRA, the 2009 Recovery Act and other bills. Under the EGTRRA sunset, the child credit would revert to $500 per qualifying child.
Earned Income Credit
EGTRRA and subsequent legislation temporarily increased the beginning and end points of the earned income tax credit (EITC), increased the credit for three or more children and made other taxpayer- friendly changes. The Senate bill extends the enhanced EITC for two years, through December 31, 2012.
Adoption Credit
EGTRRA increased the dollar limitation for the adoption credit and the income exclusion for employer-paid or reimbursed adoption expenses to $10,000 (indexed for inflation). The Patient Protection and Affordable Care Act increased the credit and exclusion by another $1,000 (adjusted for inflation) for 2010 and 2011. The PPACA also made the adoption credit refundable. The Senate bill extends the enhancements in EGTRRA to the credit and exclusion amount through December 31, 2012.
Dependent Care Credit
Taxpayer who incurs expenses to care for child under age 13 or for incapacitated dependent or spouse to work or look for work can claim a dependent care credit. EGTRRA temporarily increased the maximum amount of eligible expenses for the dependent care credit from $2,400 to $3,000 (from $4,800 to $6,000 for more than one qualifying individual). EGTRRA also raised the maximum credit from 30 to 35 percent of qualifying expenses and provided for a reduction in the credit, but not below 20 percent, by one percentage point for each $2,000, or fraction thereof, of AGI above a $15,000 threshold amount.The Senate bill extends the enhanced de- pendent care credit for two years, through December 31, 2012.
Employer-Provided Child Care
Under EGTRRA, employers may qualify for a tax credit if they make available child care to employees before 2011. The credit reaches $150,000 for qualified costs. The Senate bill extends the credit for two years, through December 31, 2012.
American Opportunity Tax Credit
The 2009 Recovery Act enhanced and renamed the Hope education credit as the American Opportunity Tax Credit (AOTC) for 2009 and 2010. The Senate bill extends the AOTC for two years, through December 31, 2012. Also extended are income limitations (the AOTC begins to phase out for single individuals with modified adjusted gross income (AGI) of $80,000 ($160,000 for married couples filing jointly) and completely phases out for single individuals with modified AGI of $90,000 ($180,000 for married couples filing jointly)
Educational Assistance Exclusion
EGTRRA allows employee to exclude up to $5,250 in employer-provided education assistance annually from income and employment taxes. Employers may deduct up to $5,250 annually for qualified education expenses paid on behalf of an employee. This treatment is scheduled to expire after 2010. The Senate bill extends these provisions for two years, through December 31, 2012.
Student Loan Interest Deduction
EGTRRA eliminated a 60-month rule for the $2,500, above-the-line, student loan interest deduction and expanded the modified AGI range for phase-out. This treatment is scheduled to expire after December 31, 2010. The Senate bill extends the enhancements for two years, through December 31, 2012.
Coverdell Education Savings Accounts
EGTRRA increased the maximum contribution amount to a Coverdell Education Savings Account (ESA) from $500 to $2,000 and, among other things, made elementary and secondary school expenses, in addition to post-secondary school expenses, qualified expenses. These enhancements are scheduled to sunset after 2010. The Senate bill extends them, for two years, through December 31, 2012.
Scholarships
Under EGTRRA, the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program are qualified scholarships for exclusion from in- come purposes. Because of EGTRRA’s sunset rules, these scholarships will be included in a recipient’s income after 2010. The Senate bill extends the income exclusion for these scholarships for two years, through December 31, 2012.
Individual Tax Extenders
The Senate bill extends a number of temporary individual tax incentives which had expired at the end of 2009. These incentives, known as extenders, would be extended for two years, through December 31, 2011. The individual incentives extended by the Senate bill are:
- State and local sales tax deduction
- Higher education tuition deduction
- Teacher’s classroom expense deduction
- Charitable contribution of IRA proceeds
- Charitable contributions of appreciated property for conservation purpose
ALTERNATIVE MINIMUM TAX
The Senate bill provides an AMT “patch” intended to prevent the AMT from encroaching on middle income taxpayers by providing higher exemption amounts and other targeted relief for 2010 and 2011. Without this patch, which had expired at the end of 2009, an estimated 21 million additional households would be subject to its reach. The Senate bill increases the exemption amounts for 2010 to $47,450 for individual taxpayers, and to $72,450 for married taxpayers filing jointly. For 2011, the amounts would be increased to $48,450 for individuals and $74,450 for married taxpayers filing jointly.
PAYROLL TAX CUT
The Senate bill reduces the employee-share of OASDI (Social Security tax) from 6.2 percent to 4.2 percent for wages earned in calendar year 2011 up to $106,800. Self- employed individuals would pay 10.4 per- cent on self-employment income up to the threshold.
BUSINESS INCENTIVES
100 Percent Bonus Depreciation
The Senate bill boosts 50-percent bonus depreciation to 100 percent for qualified investments made on or after September 9, 2010 and on or before December 31, 2011. The Senate bill also would make 50 percent bonus depreciation available for qualified property placed in service after December 31, 2011 and on or before December 31, 2012. Certain long-lived property and transportation property is eligible for 100 percent expensing if placed in service before January 1, 2013. Refundable credits in lieu of bonus depreciation. The Senate bill allows taxpayers to monetize accumulated AMT credits in lieu of taking bonus depreciation. This treatment would apply for tax years 2011 and 2012.
Code Sec. 179 Expensing
Congress has repeatedly increased the dollar and investment limits under Code Sec. 179 to encourage business spending. The 2010 Small Business Jobs Act increased the Code Sec. 179 dollar and investment limits to $500,000 and $2,000,000, respectively, for tax years beginning in 2010 and 2011. The Senate bill provides for a $125,000 dollar limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) for tax years beginning in 2012.
Small Business Capital Gains
The 2010 Small Business Jobs Act enhanced the exclusion of gain from qualified small business stock to non-corporate taxpayers. The qualified stock must be acquired at original issue and held for more than five years. For stock acquired after September 27, 2010 and before January 1, 2011, the exclusion is 100 percent. The Senate bill extends the 100 percent exclusion for qualified small business stock acquired before January 1, 2012 and held for more than five years.
Transit Benefits
The 2009 Recovery Act provided for parity among employer-provided transit benefits (at $230 adjusted for inflation) for March 2009 through the end of 2010. The Senate bill extends parity among transit benefits through the end of 2011.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is intended to encourage employers to hire individuals from targeted groups. The (WOTC) is equal to 40 percent of up to $6,000 of the targeted employee’s qualified first-year wages, subject to certain requirements. The WOTC is scheduled to expire after August 31, 2011. The Senate bill extends the WOTC through December 31, 2011 and is effective for employees hired after the date of enactment.
Business Tax Extenders
The Senate bill extends a number of business tax extenders, which had expired at the end of 2009. These business tax extenders are extended for two years: 2010 and 2011. The business tax incentives extended by the Senate bill are:
- Indian employment credit and accelerated depreciation for business property on an Indian reservation
- New Markets Tax Credit
- Railroad track maintenance credit
- Mine rescue training credit and election to expense advance mine safety equipment
- Differential wage credit 15-year recovery period for qualified leasehold improvements, restaurant building and improvements, and retail improvements
- Seven year motor sports entertainment costs recovery
- Film and television production costs
- Brown fields remediation
- Code Sec. 199 deduction for Puerto Rico
- Payments to controlling exempt organizations
- Tax treatment of certain dividends of RICs and certain investments of RICs
- Active financing exception/look-through treatment for CFCs Five-year write off of farm machinery/ equipment Tax incentives for empowerment zones
- Tax incentives for investment in the District of Columbia
- Cover over of rum excise taxes to Puerto Rico and USVI
- American Samoa economic development credit
ENERGY INCENTIVES
The Senate bill extends a number of energy tax incentives, primarily targeted to businesses, scheduled to expire after 2010. One popular energy incentive for individuals, the Code Sec. 25C residential energy property credit would be extended but with some limitations.
Business Energy Incentives
Business energy incentives extended by the Senate bill are:
- Credits for bio-diesel and renewable diesel fuel
- Credit for refined coal facilities
- New energy efficient home credit
- Excise tax credits and outlay payments for alternative fuel and alternative fuel mixtures
- Sales of electric transmission property
- Percentage depletion for oil and gas from marginal wells
- Grants for certain energy property in lieu of tax credits
- Tax credits and outlay payments for ethanol and tariff on imported ethanol
- Energy efficient appliance credit
Individuals - The Code Sec. 25C credit is designed to reward individuals who make energy efficiency improvements to their residences with a tax benefit. Under cur- rent law, the credit amount is 30 percent of the sum of expenditures for qualified energy efficiency improvements and property, such as furnaces, water heaters and other items, for 2009 and 2010 property. The credit under current law is limited to a lifetime maximum credit of $1,500 for 2009 and 2010 property. The Senate bill extends the Code Sec. 25C credit through 2011. However, the Senate bill returns the credit to its pre-2009 Recovery Act parameters.
DISASTER INCENTIVES
The Senate bill extends a number of targeted disaster relief measures. They are:
Tax incentives for the New York City Liberty Zone (9-11 relief)
Increased rehabilitation credit for historic structures in the Gulf Opportunity Zone (GO Zone)
- Low income housing tax credits for GO Zone
- Tax-exempt bonds for GO Zone
- Temporary depreciation allowance for GO Zone
BONDS
The Senate bill extends several bond pro- grams through 2012. These include tax exempt private activity bonds for qualified education facilities and qualified zone academy bonds.
CHARITABLE ACTIVITIES
In addition to extending tax-free distributions from IRAs for charitable purposes and special rules for contributions of capital gain real property for conservation purposes, the Senate bill also extends through 2011:
Charitable deduction for contributions of food inventory Charitable deduction for contributions by C corporations of books to public schools
Charitable deduction for corporate contributions of computer equipment for educational purposes.
FEDERAL ESTATE TAX
EGTRRA gradually reduced and then abolished the federal estate tax for decedents dying in 2010. The pre-EGTRRA estate tax (with a maximum tax rate of 55 percent and a $1 million exclusion) is scheduled to be revived after 2010. Additional EGTRRA changes affected the gift tax and the generation skipping transfer tax.
Estate Tax Compromise
The Senate bill imposes a maximum estate tax rate of 35 percent and an applicable exclusion amount of $5 million ($10 million for married couples) for decedents dying on or after January 1, 2011 and on or before December 31, 2012.
Stepped-Up Basis
For 2010, EGTRRA repeals the stepped- up basis rules and replaces them with a modified carryover basis regime. The Senate bill revives the traditional stepped-up basis regime for all assets included in the gross estate for decedents dying on or after January 1, 2011 and on or before December 31, 2012.
Option for 2010
The Senate bill gives estates of decedents dying after December 31, 2009 and before January 1, 2011 the opportunity to elect to apply the carryover basis rules under EGTRRA with no estate tax, or the revived estate tax and stepped-up basis rules under the bill.
Portability
The Senate bill provides for “portability.” Generally, portability would allow a surviving spouse to elect to take advantage of the unused portion of the estate tax exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount.
Filings
The Senate bill gives estates of decedents dying after December 31, 2009 and before the date of enactment extended time (generally nine months) to perform certain acts. These include the filing of any return and the making of any payment.
Gift Taxes
Under EGTRRA, the gift tax is retained despite repeal of estate and GST taxes after December 31, 2009. For gifts made after December 31, 2009, the gift tax is computed using a rate schedule having a top tax rate of 35 percent and a maxi- mum applicable exclusion amount of $1 million. The Senate bill provides for a top tax rate of 35 percent and a $5 million exclusion for two years, through December 31, 2012.
GST
Under EGTRRA, the GST tax does not apply to generation skipping transfers made after December 31, 2009 and before January 1, 2011. The Senate bill provides for a zero percent GST rate for 2010 and a $5 million exemption. The Senate bill revives the GST tax for 2011 and 2012 at the maximum estate tax rates and exclusion.