The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010), P.L. 111-312, which Congress passed on December 16 and President Barack Obama signed into law the next day, extended the ordinary income tax rates introduced in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), P.L. 107-16, in 2001 and the capital gain tax rates introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), P.L. 108-27, in 2003, reduced the estate tax, and extended a large number of expired or expiring provisions. The legislation incorporated the elements of the deal struck by congressional and Obama administration negotiators on December 6 but also included many other provisions in addition to those that were reported to be part of the original deal.
The bill has provisions from four of the five tax areas that were considered to be important for Congress to address during its “lame duck” session: the estate tax, expiring tax cuts, expired tax provisions, and the alternative minimum tax (AMT). The bill does not address the expanded Form 1099 reporting requirements.
When Congress enacted EGTRRA and JGTRRA, it included sunset provisions, under which most of the changes in the acts would expire after 2010. These sunset provisions were included to keep the costs of the bills small enough to ensure widespread support in Congress. The Tax Relief Act of 2010 amends EGTRRA and JGTRRA to postpone the sunset of the affected provisions until after 2012.
Extension of EGTRRA and JGTRRA Provisions
EGTRRA introduced a new 10% tax bracket below the 15% bracket for individuals and reduced the other tax brackets to 25%, 28%, 33%, and 35%. Those changes were scheduled to sunset after 2010 so that in 2011 the 10% rate would disappear (with income in that bracket reverting to the 15% bracket) and the other rates would revert to 28%, 31%, 36%, and 39.6%, respectively. With the Tax Relief Act of 2010’s postponement of the EGTRRA sunset, those rates will continue through 2012.
In 2003, JGTRRA also lowered the capital gain tax rate to 15% (0% for taxpayers in the 10% and 15% tax brackets). These rate changes were also scheduled to expire after 2010. The act’s postponement of the JGTRRA sunset will continue the lowered capital gain tax rate through 2012.
The act also extends EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout for two years through 2012.
The wisdom of leaving the tax rates at their current levels for two more years and whether they should be left at the present levels after that period will undoubtedly be a subject of great debate. Although the extension of the rates set by EGTRRA and JGTRRA are commonly referred to as extensions of “tax cuts,” this terminology makes sense only if the prior rates, which were enacted during the Clinton Administration as part of the Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, are treated as a permanent baseline for tax rates. However, these rates were increases to the rates put in place by the Omnibus Budget Reconciliation Act of 1990, P.L. 101-508, which were in turn increases to the rates put in place by the Tax Reform Act of 1986, P.L. 99-514.
Payroll Tax Reduction
For 2011 only, the legislation would also reduce the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remains at 6.2%).
This payroll tax reduction is a replacement for the $400 making work pay credit, which expired at the end of 2010. However, while the making work pay credit was phased out for taxpayers with adjusted gross income above $75,000 ($150,000 for married taxpayers filing joint returns), the new provision applies to all workers who pay payroll taxes, regardless of income level.
Congress has temporarily increased the AMT exemption amount several times in recent years. These successive increases are commonly referred to as the “AMT patch.” The most recent increase was for 2009; for 2010 the AMT exemption amounts reverted to their pre-EGTRRA statutory amounts: $45,000 for married individuals filing jointly, less 25% of alternative minimum taxable income exceeding $150,000; $33,750 for unmarried individuals, less 25% of alternative minimum taxable income exceeding $112,500; and $22,500 for married individuals filing separately, less 25% of alternative minimum taxable income exceeding $75,000. The Tax Relief Act of 2010 increases the AMT exemption amounts for 2010 and 2011. For 2010, the AMT exemption amounts are $47,450 for unmarried individuals, $72,450 for married individuals filing jointly, and $36,225 for married individuals filing separately. For 2011, the amounts will be $48,450, $74,450, and $37,225, respectively. In addition, the new law extends the 0% and 15% capital gain rates for the AMT, the AMT offset of the child tax credit, and the 7% AMT preference for excluded gain on the disposition of qualified small business stock through 2012. It also extends the offset of nonrefundable personal credits against the AMT, but only through 2011.
While the higher exemption amounts temporarily protect many taxpayers from the grasp of the AMT regime, they do nothing to solve the long-term problems posed by the AMT. While many legislators continue to talk about doing something about the AMT, fundamental changes are only likely to come about as a part of a comprehensive tax reform package.
Bonus Depreciation and Sec. 179 Expensing
The Tax Relief Act of 2010 allows taxpayers to deduct 100% of the cost of business property acquired after September 8, 2010, and before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property). The act also extends the election to accelerate pre-2006 AMT tax credits in lieu of bonus depreciation to property acquired after December 31, 2007, and placed in service in 2011 or 2012. However, the election does not apply to property placed in service in 2010.
The act also sets the expensing limitation under Sec. 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. The act then reduces these amounts to $25,000 and $200,000 for tax years beginning after 2012.
In a time of economic recession, the extension of bonus depreciation and the increased Sec. 179 expensing amounts would seem to be a positive development. However, due to the many challenges facing businesses today, it is uncertain how much impetus these provisions will provide for businesses to invest immediately in depreciable property.
EGTRRA enacted a slow repeal of the estate and generation-skipping transfer (GST) taxes. Under the EGTRRA provisions, the estate and GST tax rates gradually declined until those taxes were eliminated in 2010. Under the EGTRRA sunset provision, the estate tax repeal was to be in effect for 2010 only. After that, the estate and GST regime in place before the passage of EGTRRA would spring back to life, as if EGTRRA had never been enacted. This means that starting January 1, 2011, the estate tax exemption would have been $1 million (adjusted for inflation), the tax rate would have been 55%, and the state death tax credit would have been revived.
EGTRRA also repealed the step-up in basis for assets passing at death. Instead, inherited assets were subject to a modified carryover basis rule in 2010. Under this rule, a recipient’s basis in property acquired from a decedent is the lesser of the adjusted basis of the property at death or the fair market value (FMV) on the date of death. The carryover basis provision also would have sunset after December 31, 2010.
The Tax Relief Act of 2010 reinstates the estate tax at a rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011). In addition to the increase in the exemption amount, for decedents dying after 2010, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount.
For estates of decedents dying in 2010, an election will be available either to be subject to the reinstated estate tax or to be subject to the modified carryover basis rule. Estates of decedents dying in 2010 are eligible for an extension to file an estate tax return until nine months after December 17, 2010.
The act also reinstates the GST tax, and the due date for filing a 2010 return is extended to nine months after December 17, 2010. However, for GSTs made during 2010, the tax rate will be zero. The act also increases the gift tax credit (reunifying it with the estate tax credit) to $5 million for gifts made after 2010.
The increased estate tax exemption and the “portability” provision allowing surviving spouses to use the remainder of the decedent’s exemption amount have dealt a blow to the estate planning field because, under the new rules, it is likely that few married couples will need to do any extensive planning to avoid the estate tax.
Extension of Expired Provisions
A variety of temporary tax provisions, often referred to as “extenders,” expired at the end of 2009; more were scheduled to expire at the end of 2010. These expired provisions include tax credits, deductions, and various tax incentives. The Tax Relief Act of 2010 extends many of these provisions, including those listed below.
Individual provisions extended: All of the following were extended for two years through 2012:
- Marriage penalty relief (i.e., the increased standard deduction for married taxpayers filing jointly);
- The $1,000 child tax credit amount (previously scheduled to revert to $500 after 2010) and the expanded refundability of the credit;
- The increased starting and ending points for the earned income credit and the increase in the credit amount for families with three or more qualifying children;
- The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one);
- The American opportunity tax credit;
- The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts;
- The enhanced rules for student loan deductions introduced by EGTRRA;
- The exclusion for employer-provided educational assistance (Sec. 127);
- The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships (Sec. 117(c)(2)); and
- The treatment of mortgage insurance premiums as interest (Sec. 163(h)(3)(E)).
The following provisions have been extended for one year through 2011:
- The parity for exclusion from income for employer-provided mass transit passes and parking benefits (Sec. 132);
- The allowance for tax-free distributions from individual retirement plans for charitable purposes (Sec. 408(d)(8));
- The temporary 100% exclusion of gain from the sale of certain small business stock under Sec. 1202, enacted by the Small Business Jobs Act of 2010, P.L. 111-240;
- The deduction for tuition and related expenses (Sec. 222);
- The state and local sales tax deduction (Sec. 164);
- The deduction for elementary and secondary school teachers (Sec. 62(a)(2)(D));
- The nonbusiness energy property credit (under the rules in effect before the American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111-5) (Sec. 25C);
- The credit for first-time Washington, DC, homebuyers (Sec. 1400C); and
- The special rules for contributions of qualified conservation easements by individuals.
General business-related credits: The following credits are extended through 2011:
- The research and development credit (Sec. 41);
- The credit for certain railroad track expenditures (Sec. 45G); and
- The mine rescue team training credit (Sec 45N).
The employer-provided child care credit (Sec. 45F) was extended through 2012.
Business-related employment credits: The following credits are extended through 2011:
- The Indian employment tax credit (Sec. 45A);
- The employer wage credit for active duty members of the uniformed services (Sec. 45P); and
- The work opportunity credit (Sec. 51).
Energy-related credit extensions: The following credits are extended through 2011:
- The Sec. 25C credit for nonbusiness energy property (which would be returned to the limitations and standards applicable before amendment by ARRA);
- The alternative fuel vehicle refueling property credit (Sec. 30C);
- The credit for alcohol used as fuel (Sec. 40);
- The credit for biodiesel and renewable diesel fuel (Sec. 40A);
- The credit for refined coal facilities (Sec. 45(d)(8));
- The new energy-efficient home credit (Sec. 45L);
- The energy-efficient appliance credit (Sec. 45M); and
- The excise tax credits for alternative fuels (Secs. 6426 and 6427).
In addition, the Tax Relief Act of 2010 extends through 2011 grants under ARRA for specified energy property in lieu of tax credits.
Business charitable deduction extensions: The act extends the following deductions for contributions made before 2012:
- The deduction for contributions of capital gain real property made for conservation purposes (Sec. 170(b)(1)(E)(vi));
- The enhanced deduction for contributions of food inventory (Sec. 170(e)(3)(C)(iv));
- The enhanced deduction for contributions of book inventory to public schools (Sec. 170(e)(3)(D)(iv)); and
- The enhanced deduction for corporate contributions of computer equipment for educational purposes (Sec. 170(e)(6)(G)).
Cost recovery extensions: The following cost recovery provisions were extended through 2011:
- Fifteen-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements (Sec. 168(e)(3)(E));
- Accelerated depreciation for property on Indian reservations (Sec. 168(j));
- Expensing treatment for certain film and television productions (Sec. 181(f));
- The expensing of environmental remediation costs (Sec. 198(h));
- The deduction for income attributable to domestic production activities in Puerto Rico (Sec. 199(d)(8));
- The suspension of limitation on percentage depletion for oil and gas from marginal wells (Sec. 613A(c));
- The seven-year cost recovery period for motor sports entertainment complexes (Sec. 168(i)(15)(D)); and
- The election to expense advanced mine safety equipment (Sec. 179E(g)).
The expensing and special depreciation allowance for qualified disaster assistance property (Sec. 168(n)) was extended through 2012.
Foreign provision extensions: The act extended the following foreign-related provisions through 2011:
- The exceptions from Subpart F income for active financing income (Secs. 953(e) and 954(h));
- The Sec. 954(c) lookthrough treatment of payments between related controlled foreign corporations (Sec. 954(c));
- The exemption from withholding tax on interest-related dividends and short-term capital gain dividends received paid to a foreign person by a regulated investment company (Sec. 871(k)(1)(C)); and
- The American Samoa economic development credit under the Tax Relief and Health Care Act of 2006, P.L. 109-432.
In addition, the act authorizes the IRS to continue applying through 2012 a 15% withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons.
S corporation extensions: The change to the Sec. 1367(a)(2) basis adjustment rule for stock of S corporations making contributions to charity (i.e., the decrease in the shareholder’s basis is the shareholder’s pro-rata share of the adjusted basis of the property contributed) is extended through 2011.
Zone and other development incentives: The following credits and incentives in this category were extended through 2011:
- Empowerment zone incentives (Sec. 1391);
- District of Columbia Enterprise Zone incentives (Secs. 1400, 1400A, and 1400B);
- New York Liberty Zone bonus depreciation (Sec. 1400L(b));
- Gulf Opportunity Zone incentives (Sec. 1400N);
- Qualified zone academy bonds (Sec. 54E), but not the Sec. 1397E credit for holders of qualified zone academy bonds, and the Sec. 6431 refundable credit is repealed; and
- The new markets tax credit (Sec. 45D).
Other miscellaneous extended provisions: Other expired and expiring provisions that the act extends include:
- The special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities (Sec. 451); and
- The special rules for certain amounts received by tax-exempt organizations from controlled entities (Sec. 512(b)(13)).
Provisions Not Extended
A few notable expired provisions that were contained in earlier proposed extenders legislation but did not make the cut in the Tax Relief Act of 2010 include:
- The credits for alternative motor vehicles, advanced lean burn technology motor vehicles, qualified hybrid motor vehicles, and qualified alternative fuel vehicles (Sec. 30B);
- The additional standard deduction for state and local real property taxes (Sec. 63(c)(1));
- The deduction for personal casualty losses in federally declared disasters (Sec. 165(h));
- The carryback of net operating losses attributable to federally declared disasters (Sec. 172(j)); and
- The renewal community tax incentives (Sec. 1400E).
Many of the provisions extended in the act (such as the zone incentives for areas that have been affected by natural disasters) represent tax incentives that logically should not be permanent provisions and that should be subject to frequent review to ensure that they are still necessary and appropriate. However, other incentives, such as the research and development credit, presumably will always be desirable policy and would be more effective if made permanent. While there can be no guarantee that any particular provision will not be repealed in the future, making permanent provisions that could legitimately require long-term planning on the part of taxpayers would go a long way to reducing the confusion and uncertainty that cause the provisions to be underutilized.
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312)