For many years we have known that the "2001/2003" or "Bush" tax cuts are scheduled to expire at the end of 2010. We may have thought that at some point in this span of years, the cuts would be made permanent or that major changes would be made to the federal tax law so we would not have a significant tax increase in 2011. With just a few months left of 2010, it remains to be seen whether any will be extended. In addition to the 2001 and 2003 tax cuts, various tax laws since have included provisions that terminate at the end of 2010. If nothing is extended, we are going to see a much different set of tax rates and calculations for 2011 than we have had in the past few years.
This article provides a brief history on how December 31, 2010 became such a significant date in the federal tax system. A quiz is included to help you gauge how well you remember the rules that existed before the temporary 2001/2003 changes were enacted.
In June 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA; P.L. 107-16; 6/7/01) was signed into law. Act §901 provided:
"SEC. 901. SUNSET OF PROVISIONS OF ACT.
(a) IN GENERAL. — All provisions of, and amendments made by, this Act shall not apply —
1. To taxable, plan or limitation years beginning after December 31, 2010, or
2. In the case of title V, to estates of decedents dying, gifts made or generation skipping transfers, after December 31,2010.
(b) APPLICATION OF CERTAIN LAWS. — The Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted."
The EGTRRA tax cuts had varying effective dates with several, such as the phase-out of the overall limitation on itemized deductions (IRC §67), not effective until 2006. Others, such as individual tax rate reductions started in 2001 (IRC §1(i)). EGTRRA tax cuts included individual income tax rate reductions, repeal of both the itemized deduction and personal exemption phase-outs, marriage penalty relief, an increase in the child credit and adoption credit, an increase in individual retirement account (IRA) contribution amounts, and repeal of the estate and generation-skipping transfer taxes. The 10-year cost of EGRTTA (2001 – 2011) was estimated to be $1.3 trillion (House Report 107-84 (PDF), page 340).
The Jobs and Growth Tax Relief Reconciliation Act of 2001 (JGTRRA; P.L. 108-27; 5/28/03) accelerated the starting date of some of the 2001 tax reductions. JGTRRA also included reduced tax rates for capital gains and qualified dividends, as well as bonus depreciation and a larger expensing election. JGTRRA included a sunset date of December 31, 2008. This date was extended to December 31, 2010 by the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222; May 17, 2006).
Subsequent to the 2005 Act, there were additional changes many of which also expire after 2010. For example, various stimulus bills changed the expensing election of §179 that expire after 2010.
Finally, there are several provisions in the law that have always been temporary, typically lasting for just one year. Per the Joint Committee on Taxation, 66 provisions (including 2001 and 2003 tax cuts) expire at December 31, 2010 (see JCX-3-10, noted later). If Congress extends provisions that expired at the end of 2009, such as the research credit and special deduction for teacher expenses, through 2010, there will be even more provisions that expire at the end of 2010.
The following twelve questions do not cover all of the items set to expire at the end of 2010. They are intended to provide an overview of the range of changes should any or all not be extended. The answers are provided at the end of the article.
- What are the lowest and highest individual tax rates on ordinary income for 2011?
- What is the highest corporate tax rate for 2011?
- What capital gains rate applies to a person not in the lowest tax bracket, who, after 2010, sells stock held for over five years?
- What is the tax rate on dividend income of a single individual with taxable income in excess of $500,000?
- What is the child tax credit amount for 2011?
- What is the maximum amount for calculating the dependent care credit for one child for 2011?
- In 2011, the standard deduction for married, filed jointly (MFJ) will be approximately X percent of the standard deduction for single taxpayers.
- What is the maximum contribution amount for an education IRA in 2011?
- What is the rate for the personal company holding tax in 2011?
- What is the gain exclusion percentage for qualified small business stock (QSBS) acquired in 2011?
- What is the §179 expensing amount for 2011?
- What is the maximum estate tax rate in 2011?
- 15 percent and 39.6 percent (up from 10% and 35%). [§1]
- 35 percent (there was no change to the corporate rates by the 2001 and 2003 legislation). [§11]
- 18 percent (up from 15%). If the stock is not held over five years, the capital gains rate would be 20 percent. [§1(h)]
- 39.6 percent (up from 15%). Dividend income is taxed as ordinary income, rather than capital gains, after 2010. [§1(h)(11) sunsets after 2010]
- $500 (down from $1,000). [§24]
- $2,400 (down from $3,000) [§21]
- 166 percent (rather than double the standard deduction for singles). The deduction was doubled to help reduce the "marriage penalty." [§63(c)]
- $500 (down from $2,000). [§530]
- 39.6 percent (up from 15%). [§541] A similar change applies to the accumulated earnings tax of §531.
- 50 percent. Under the American Recovery and Reinvestment Act of 2009 (P.L. 111-5; February 17, 2009), the exclusion amount was increased to 75 percent for QSBS acquired after February 17, 2009 and before 2011.
- $25,000 (down from $250,000 as increased by the Hiring Incentives to Restore Employment Act (P.L. 111-147; March 18, 2010). This amount is reduced by the cost of §179 property placed in service during the year in excess of $200,000. After 2010, §179 property does not include software.
- 55 percent (there is no estate tax in 2010 and the maximum rate was 45% in 2009). [§2001]
Tax practitioners will have a lot of rules to re-acquaint themselves with due to the scheduled expiration of so many special rates and rules for 2011. The Joint Committee on Taxation report on provisions that expire from 2009 to 2030 (JCX-3-10; see link above) provides a helpful list of the 60-plus provisions expiring on December 31, 2010. This list also serves as a helpful planning tool as to favorable rules to act upon before year end.
While practitioners are reviewing the expiring provisions for planning purposes and to relearn prior law, Congress will likely be discussing whether any provisions should be extended. Stay tuned!
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