The 2010 Tax Relief Act: Good News for U.S. Taxpayers


	Jim Schmidt

December 2010

The 2010 Tax Relief Act: Good News for U.S. Taxpayers

The 11th-hour deal by Congress and the White House extends the Bush tax cuts and brings favorable changes to many other tax issues affecting business and individuals

In a welcome move for U.S. taxpayers in all income tax brackets, on December 16 the House of Representatives approved the Senate-passed “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (the 2010 Tax Relief Act), which President Obama signed into law the next day.

The 2010 Tax Relief Act includes:

an extension of the Bush-era tax cuts for two years,
estate tax relief,
a two-year “patch” of the alternative minimum tax (AMT),
a 2-percentage-point cut in employee-paid payroll taxes and self-employment tax for 2011,
new incentives to invest in machinery and equipment, and
many retroactively revived and extended tax breaks (too numerous to describe here) for individuals and businesses.

Personal Income Taxes. The tax rate schedules for individuals will remain at 10%, 15%, 25%, 28%, 33% and 35% for two additional years, through 2012. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% of the 15% tax bracket for individual filers through 2012.

The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% of the standard deduction for single taxpayers for two additional years, through 2012. Also, a higher-income taxpayer's personal exemptions are not phased out for two additional years (for 2011 and 2012) when AGI exceeds an inflation-adjusted threshold.

With respect to capital gains and qualified dividends, adjusted net capital gain will be taxed at a maximum rate of 15% for two additional years, through 2012. A qualified dividend paid to individuals will be taxed at the same rates as adjusted net capital gain through 2012.

The 2010 Tax Relief Act also extends, generally for two years, such beneficial tax provisions as the child tax credit, earned income tax credit, adoption credit, employer-provided child care tax credit, dependent care tax credit, and education incentives.

Estate and Gift Taxes. The 2010 Tax Relief Act lowers estate tax and generation-skipping transfer (GST) tax for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million and reducing the top rate from 55% to 35%. The $5 million exemption is per person; thus, there is a $10 million exemption for a married couple.

For gifts made after December 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%.

Under a new “portability” feature for married couples, any exemption that remains unused as of the death of a spouse who dies after December 31, 2010 (the “deceased spousal unused exclusion amount”) is generally available for use by the surviving spouse, as an addition to the surviving spouse's exemption. A surviving spouse may use the predeceased spousal carryover amount in addition to his or her own $5 million exclusion for taxable transfers made during life or at death.

Alternative Minimum Tax. A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.

Payroll Taxes. For salaries, wages and self-employment income received during 2011, the Act reduces the employee OASDI tax rate under the FICA tax by two percentage points, to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduces the OASDI tax rate under the SECA tax by two percentage points, to 10.4% percent. As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.

Business Purchasing Incentives. The 2010 Tax Relief Act extends and expands additional first-year depreciation to equal:

100% of the cost of qualified property placed in service after September 8, 2010, and before January 1, 2012 (before January 1, 2013, for certain longer-lived and transportation property); and
50% of the cost of qualified property placed in service after December 31, 2011, and before January 1, 2013 (after December 31, 2012, and before January 1, 2014, for certain longer-lived and transportation property).

For tax years beginning in 2012, the 2010 Tax Relief Act increases the maximum expensing amount under Code Sec. 179 from $25,000 to $125,000 and increases the investment-based phase-out amount from $200,000 to $500,000.

The 2010 Tax Relief Act also retroactively extends the research credit for two years so that it applies for amounts paid or accrued before January 1, 2012.

Tax Extenders. Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit.

Strategic Considerations. This new tax law creates many opportunities; here are just a few examples:

Looking for more business deductions? Businesses that purchase new qualifying assets can write off 100% of the cost. This is not only unprecedented; it is retroactive to assets bought after September 8, 2010. And there are no income limitation rules such as under Section 179.
Since the maximum individual tax rates are the same through 2012, the 2010 strategy of converting an IRA to a Roth IRA and electing to defer and spread that income between 2011 and 2012 is very enticing. If you have an IRA, you should review your situation and see if this would be beneficial to implement before year end. Your Schmidt Westergard tax advisor can assist you in evaluating this opportunity.
Beginning in 2011, any person can make lifetime gifts of up to $5 million without paying gift tax. That's a whopping increase over the former $1 million lifetime limit. Every high net worth individual should consider additional gifting opportunities in 2011. In addition, wills and trusts should be reviewed and updated.

Conclusion. The 2010 Tax Relief Act contains other, less-publicized provisions that, while too numerous to discuss here, are extremely important to many business and individual taxpayers. For a review of how the new tax law might apply to your situation, contact your Schmidt Westergard & Company tax professional.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.