Sen. Reid stated, “This bill is not perfect, but it provides the economic boost middle-class families and small businesses in Nevada and across America need. Middle-class families and small businesses will see their taxes go down.”
There are provisions in the tax act that are the result of a compromise between President Obama, Democratic Senators and Republican Leaders of the House and Senate. President Obama announced the compromise earlier in the week and indicated that it was important to the economy to resolve the differences in the party. While he recognized that each party favors parts of the bill and strongly opposes other provisions, President Obama suggested that avoiding a tax increase in January for all Americans and assisting the two million Americans who are losing their unemployment insurance is very important. Therefore, a bipartisan compromise is the best option.
The tax act includes many provisions that affect individual income taxes, business and corporate taxes and the estate tax. Most tax provisions will be extended for two years.
1. Tax Brackets – The existing 10%, 25%, 28%, 33% and 35% tax brackets will be extended for two years.
2. Personal Exemption and Itemized Deduction Limits – The phaseout of personal exemptions for higher-income tax payers will be repealed for two years. Similarly, the limit on itemized deductions for higher-income tax payers will not apply for two years.
3. Capital Gains Tax – For individuals in the 10% and 25% income tax bracket, there is a 0% capital gains tax rate. Those individuals in the 28%, 33% and 35% bracket pay a 15% tax on long-term capital gains for the next two years.
4. Child Credit – The $1,000 per child credit is extended for 2011 and 2012.
5. Family Benefits – The dependent care credit, the adoption tax credit, the adoption assistance program and the employer credit for child care are all extended.
6. Earned Income Tax Credit (EITC) – The EITC had been expanded for 2010 to 45% of the first $12,570 for families with three or more children. This is also extended for 2011 and 2012.
7. Education Incentives – Coverdell education savings accounts, employer-provided educational assistance, expanded student loan interest deductions and the American Opportunity Tax Credit are extended for two years.
8. Alternative Minimum Tax (AMT) – The 2010 exemption under AMT is adjusted to $72,450 for couples and $47,450 for single persons.
9. Estate Taxes – The estate exemption is increased to $5 million per person with a top estate tax rate of 35% and marital deduction portability.
10. Business Benefits – Corporations that acquire property between September 8, 2010 and the end of 2011 will be permitted a 100% bonus depreciation.
11. Payroll Taxes – The 2010 payroll tax is 6.2% for the employee and 6.2% for the employer for a total of 12.4%. In 2011 this is reduced to 4.2% for the employee and 6.2% for the employer, for a total rate of 10.4%.
12. Tax Extenders – The traditional tax extenders such as the $250 classroom supplies deduction for teachers, the deduction of state and local taxes, the IRA charitable rollover and other similar provisions are effective for 2010 and 2011.
Editor’s Note: The Senate opened debate on the bill on Friday, Dec. 10. If the procedural votes early next week are successful, the Senate will attempt to gather 60 votes for passage of the bill. If it is passed, the bill will be sent to the House. House Democrats caucused this week and voted to oppose the bill. Speaker Pelosi indicated that the House Democrats would “reject the Senate Republican tax provisions as currently written.” However, she continued to discuss the bill with the President. Both the House and Senate could pass the bill within the next week. Most commentators suggest that the tax cuts and unemployment benefits are sufficient for enactment of the Senate bill this month.
IRA Rollover for 2010
The principal rules for direct transfers from an IRA to a qualified public charity are that the IRA owner must be 70½ or older and that the transfer is for no more than $100,000 each year. The transfer does qualify for the required minimum distribution. It must be to a public charity either outright or for a specific purpose, but may not be to a donor advised fund or supporting organization. The transfer is made directly from a trustee to the charitable organization. GiftLaw Pro Chapter 4.6.8 covers the specifics of the IRA Charitable Rollover.
A very important potential 2010 benefit exists if the act passes. Because the drafters recognized that it is very late in the year, individuals who choose to make a qualified charitable distribution (QCD) from their IRA trustee to a charity may make their 2010 distribution any time during 2010 or during January of 2011. Congress determined that the time necessary to make these transfers should be extended for one additional month for the required 2010 distributions.
A number of donors have previously made 2010 qualified charitable distributions. A 2010 qualified distribution from the IRA custodian to the charity will be permitted even if it was before the date of enactment.
Advisors for donors should consider the IRA Charitable Rollover for 2010 required minimum distributions. While it is quite possible that the bill could pass and be enacted by the 20th of December, it will require fairly quick action to take advantage of this option. Since the IRA Charitable Rollover first was passed in 2006, thousands of donors have enjoyed the convenience and benefits of this gift strategy.
Charitable Tax Extenders for 2010 and 2011
The six charitable provisions include the following:
1. Conservation Gift Limits – Gifts of property for conservation purposes benefit from increased deduction limits. The normal 30% limit for appreciated property gifts is increased to 50% and the carry-forward limit is extended from five years to 15 years.
2. Food Inventory Gifts – An enhanced deduction for contributions of “apparently wholesome” food will be available for all donors. The deduction is the lesser of twice the basis or basis plus one-half of the appreciation.
3. Book Inventory Gifts – C Corporations may claim an enhanced deduction for book inventory gifts to public schools. The schools may be from kindergarten through grade 12.
4. Computers and Software – Corporations may make gifts to elementary, secondary and post-secondary schools of computer equipment. These deductions will qualify for the enhanced contribution.
5. IRA Charitable Rollover – Each IRA owner may make a transfer of up to $100,000 per year to a qualified charity. The IRA charitable rollovers are tax-free and not included in adjusted gross income.
6. S Corporation Appreciated Gifts – S corporations may give appreciated stock or land to charity. Only the basis to the S corporation will be used to reduce the shareholder basis, even though the full fair market value deduction is claimed by the shareholder.
Estate Tax Reform
The estate tax section of the bill carries the title “Temporary Estate Tax Relief” and includes Sections 301, 302, 303 and 304.
Section 301 reinstates the estate tax and repeals carryover basis. Executors of decedents who passed away in 2010 are permitted to elect either to file IRS Form 706 and apply the 2010 existing laws, or to elect to use the new $5 million applicable exclusion amount and 35% top estate tax rate. Because some decedents passed away early in year 2010 and the normal tax payment date has passed, the required due date for the tax return or payment of tax will be nine months after the date of enactment. Therefore, the due date for estate tax payments and returns for 2010 decedents will be late September of 2011.
For 2010 decedents, the filing date for GSTT returns will also be nine months after date of enactment.
Sec. 302 addresses the gift, estate and GSTT exclusion amounts. The applicable exclusion amount will be $5 million for 2011 and for executors who elect to apply that amount to 2010. This amount will be adjusted for inflation starting in 2012 in $10,000 increments.
The estate tax rate will be 35%. Estate tax will equal $155,800 on the first $500,000 and 35% of the excess over that amount. The unified credit calculated based on a $5 million estate will be $1,730,800.
The gift tax is again reunified with the estate tax. Therefore, the estate and gift tax exemptions will be the same.
There are provisions to calculate the credit for gift taxes paid when the estate return is filed. This is necessary because there have been varying gift tax rates for many decedents. The rates of tax as of the decedent’s death shall generally be used for calculations.
Sec. 303 creates marital deduction “portability.” The applicable exclusion amount for a surviving spouse will be the basic exclusion amount of $5 million with cost of living increment plus the “deceased spousal unused exclusion amount.” This will be the basic exclusion amount of the surviving spouse over the basic exclusion amount used in the estate of the deceased spouse.
If the deceased spouse transfers all assets to surviving spouse using the unlimited marital deduction, then the surviving spouse should have available the full value of both exclusions. The amount of exclusion cannot exceed twice the basic exclusion amount and only the exclusion of the last deceased spouse may be utilized. The use of marital portability will require the executor to make an irrevocable election on IRS Form 706.
For generation skipping tax transfers during 2010, the GSTT rate shall be zero.
Editor’s Note: There has been extensive discussion in the profession about changes in planning if marital portability occurs. Many estate attorneys are likely to continue to use a bypass trust and qualified terminable interest property (QTIP) trust. A bypass trust may permit growth of assets for the benefit of family. The QTIP trust is frequently utilized to protect the inheritance for the benefit of children of the first marriage. However, marital portability will eliminate the current loss of the first estate exemption due to failure to use a bypass and QTIP trust plan.