Tax Package Provides Relief for a Year or Two
January 1, 2011
Just before the holiday recess, Congress passed a massive tax package reflecting a compromise between the President and Republicans. The measure will enable you to plan for 2011 and, to some extent, for 2012.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides more than $850 billion in tax breaks with no revenue offsetting measures. Some provisions are effective retroactively to the start of 2010; others take effect this year. Most provisions last only two years, ending in 2011 or 2012, depending on when they become effective. The purpose of retaining many of the tax breaks is to encourage consumers to spend and businesses to hire and make capital investments, all of which will stimulate the economy. Here is a brief checklist of the changes that may impact you and your business.
Temporary extension of tax relief
The marginal individual income tax rates, capital gains rate, and qualified dividend treatment are extended for 2011 and 2012. Since most small business owners pay tax on their share of business profits on their personal returns, it is welcome relief that the top rate will remain at 35%.
The alternative minimum tax (AMT), which affects individuals who successfully reduce their regular taxes but have write-offs that are not deductible for AMT purposes (such as state and local taxes), has been "patched" for 2010 and 2011 by increasing the exemption amount and allowing the AMT to be offset by nonrefundable personal credits.
- AMT exemption amounts for 2010: $72,450 for joint filers; $47,450 for singles; $36,225 for married persons filing separately.
- AMT exemption amounts for 2011: $74,450 for joint filers; $48,450 for singles; $37,225 for married persons filing separately.
Temporary estate tax relief
The estate tax rules that had been in effect in 2009, have been reinstated for 2010 through 2012, with some important modifications:
- The exemption amount is $5 million per individual.
- The top tax rate is 35%.
- There is portability for the exemption for married persons, which means that the portion of the exemption not used by the first spouse to die can be added to the surviving spouse's exemption amount.
- There is a full stepped-up basis for inherited property, so heirs pay no capital gains on sales of inherited property at a price no higher than the value of the property at the time of death.
Without this new law, there had been no federal estate tax in 2010. Under the new law, an executor of a decedent who died in 2010 can elect to use old 2010 rules (no estate tax and modified carryover basis) or new 2010 rules (estate tax over $5 million exemption, plus full stepped-up basis).
The gift tax rules for 2010 are unchanged. After 2010, the gift tax is reunified with the estate tax. Also the generation-skipping transfer tax follows estate tax rules.
Temporary employee payroll tax cut
The Social Security portion of FICA for 2011 is 4.2% (instead of 6.2%). The same rule applies for self-employed individuals. There is no change on the tax for employers or on the Medicare portion of tax on employees and self-employed individuals.
Extension for business tax rules
Just about all of the tax rules for business that had expired at the end of 2009 have been extended for 2010 and 2011. These include:
- Research credit
- Indian employment credit
- New markets credit
- Credit for wage differential payments to employees called to active duty
- 15-year recovery for qualified leasehold, restaurant, and retain improvements
- Enhanced deduction for contributions of food inventory, books, and computer inventory
- Expensing for film productions, environmental remediation, and mine safety equipment
- Basis adjustment from S corporation charitable contributions
- Empowerment zone incentives
Not extended were the 5-year recovery period for farm equipment and the credit for alternative motor vehicles.
Other extensions and changes
There are a few other extensions of business breaks to note:
- The 100% exclusion for gain from the sale of qualified small business stock for stock has been extended to stock issued in 2011 (the 100% exclusion formerly had been effective only for stock issued after September 27, 2010, and before January 1, 2011).
- 100% bonus depreciation for qualified property placed in service after September 8, 2010, and before January 1, 2012 (January 1, 2013, for certain longer lived property) and 50% bonus depreciation for 2012 (2013 for certain longer lived property).
- The work opportunity credit, which had been set to expire on August 31, 2011, has been extended through December 31, 2011. However, the two targeted groups created for 2010 and 2011 (unemployed veterans and disconnected youth) have not been extended.
Work with a tax advisor
Now is the time to discuss your personal and business tax profile with a CPA or other tax advisor. You may be able to take action to benefit from some of these breaks. You may also want to discuss your estate plans with an attorney and make revisions in light of the new law.