On December 17, 2010, President Obama signed into law the $858 billion Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) extending the existing reduced tax rates in the U.S. that would otherwise have expired on January 1, 2011. The Act extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years, extends certain business incentives, and provides a compromise in the U.S. estate tax rules. This article discusses some highlights of the 2010 Tax Relief Act, and their effect on U.S. taxpayers.
Individuals
Tax Rates: Capital Gains and Dividends
Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the individual income tax rates had been scheduled to revert from their current levels, which have a top personal tax rate of 35% to 39.6%, after December 31, 2010. The 2010 Tax Relief Act extends all individual rates at 10, 15, 25, 28, 33 and 35% for two years, through December 31, 2012.
Qualified capital gains and dividends are taxed at a maximum rate of 15% (0% for taxpayers in the 10% and 15% income tax brackets) for 2010. The 2010 Tax Relief Act continues this treatment for two years, through December 31, 2012.
Qualified dividends, which remain eligible for the reduced tax rates, are dividends received from a domestic corporation or a qualified foreign corporation, on which the underlying stock is held for at least 61 days within a specified 121-day period. A qualified foreign corporation is one that is eligible for U.S. treaty benefits or has stock that is readily tradable on an established U.S. securities market. The reduced tax rates do not apply to dividends received from an organization that is exempt from U.S. taxation.
Estate Tax
The estate tax will be reinstated in 2011 and 2012 with a 35% top rate and a $5 million individual exemption modified for inflation after 2011. For the estates of decedents dying in 2010, the law allows executors to elect either the new levels or the prior 2010 regime with no estate tax and modified carryover basis rules. If the U.S. Congress had not acted, the estate tax would have returned in 2011 with a 55% top rate and only a $1 million individual exemption.
The 2010 Tax Relief Act provides for "portability" provides for "portability" between spouses of the estate tax applicable exclusion amount. Generally, portability would allow a surviving spouse to elect to take advantage of the unused portion of the estate tax applicable exclusion amount of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount. A "deceased spousal unused exclusion amount" would be available to the surviving spouse only if an election is made on a timely filed estate tax return. Portability would be available to the estates of decedents dying after December 31, 2010. With the election and careful estate planning, married couples can effectively shield up to $10 million from estate tax by maximizing each spouse's $5 million applicable exclusion. Because this provision is scheduled to "sunset" after 2012, the utility of the portability election is limited to situations in which both spouses die within the two-year period (that is, 2011-2012).
The Act also expands the lifetime gift exemption to $5 million ($10 million for couples), up from the current level of $1 million ($2 million for couples), and imposes a 35% gift tax on amounts over that threshold through 2012.
Business Incentives
100% Bonus Depreciation
The 2010 Tax Relief Act boosts bonus depreciation from 50% to 100% for qualified investments made after September 8, 2010 and before January 1, 2012. The Act also makes 50% bonus depreciation available for qualified property placed in service after December 31, 2011 and before January 1, 2013. Certain long-lived property and transportation property is eligible for 100% expensing if placed in service before January 1, 2013
Section 179 Expensing
The U.S. Congress has repeatedly increased the dollar and investment limits under Code section 179 to encourage business spending. The 2010 Small Business Jobs Act increased the section 179 dollar and investment limits to $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The 2010 Tax Relief Act provides for a $125,000 dollar limit and a $500,000 investment limit (both limits indexed for inflation) for tax years beginning in 2012 (and sunsetting after December 31, 2012). The Act also extends the treatment of off-the-shelf computer software as qualifying property if placed in service before 2013.
Research Tax Credit
The section 41 research tax credit expired at the end of 2009. The 2010 Tax Relief Act renews the credit for two years, through December 31, 2011, and is effective for amounts paid or incurred after December 31, 2009.
Small Business Stock
The 2010 Small Business Jobs Act enhanced the exclusion of gains from qualified small business stock to non-corporate taxpayers. For stock acquired after September 27, 2010 and before January 1, 2011, and held for at least five years, the 2010 Small Business Jobs Act provided an exclusion of 100% of the gain. The 2010 Tax Relief Act extends the 100% exclusion for one more year, for stock acquired before January 1, 2012.
Contact your Collins Barrow advisor for further information regarding US Tax.
Joseph Sardella, CA, CPA, is a Partner, U.S. Tax in the Toronto office of Collins Barrow.
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