TAX RELIEF ACT OF 2010

11611 Pond Road Suite 300 Allentown, PA 18104 ● 610-391-1800 ● 610-391-1779 (fax)

May 12, 2011www.thsLaw.com

presented by

R. Nicholas Nanovic, Esq.

TAX RELIEF ACT OF 2010TAX RELIEF ACT OF 2010

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Tax Relief Act of 2010Tax Relief Act of 2010

• Official name: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

• Public Law 111-312• Signed into law on December 17, 2010• Affects personal income taxes, business

income taxes, and estate/gift taxes

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Personal Income Tax: Personal Income Tax: RatesRates

• Ordinary Income Tax Rates– 2010 rates extended to 2011 and 2012

2010 2011-2012 2013+

10% 10% 15%

15% 15% 15%

25% 25% 28%

28% 28% 31%

33% 33% 36%

35% 35% 39.6%

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• Ordinary Income Tax Rates– 2010 tax brackets


Single MFJ

10% $0 - 8,375 $0 - 16,750

15% $8,376 - 34,000 $16,751 -68,000

25% $34,001 - 82,400 $68,001- 137,300

28% $82,401 - 171,850 $137,301 - 209,250

33% $171,851 - 373,650 $209,251 -373,650

35% $373,651+ $373,651+

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• Capital Gains Rates– 2010 long term capital gain rates extended to

2011 and 2012

Income Tax Bracket 2010 2011-2012 2013+

10% (15%) 0% 0% 10%

15% (15%) 0% 0% 10%

25% (28%) 15% 15% 20%

28% (31%) 15% 15% 20%

33% (36%) 15% 15% 20%

35% (39.6%) 15% 15% 20%

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• Qualified Dividend Rates– 2010 rates extended to 2011 and 2012– Taxed as ordinary income after 2012

Income tax bracket 2010 2011-2012 2013+

10% (15%) 0% 0% 15%

15% (15%) 0% 0% 15%

25% (28%) 15% 15% 28%

28% (31%) 15% 15% 31%

33% (36%) 15% 15% 36%

35% (39.6%) 15% 15% 39.6%

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• Alternative Minimum Tax (AMT)– Alternative minimum tax exemption amounts

increased for 2010 and 2011, subject to phaseouts

– Phaseouts of $112,500 (Single or HoH), $150,000 (MFJ), and $75,000 (MFS)

– Tax rate remains 26% for first $175,000 of post-exemption amount and 28% for excess

Status 2010 Exemption 2011 Exemption 2012 Exemption

Single or HoH $47,450 $48,450 $33,750

MFJ $72,450 $74,450 $45,000

MFS $36,225 $37,225 $22,500

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• Payroll Tax Holiday (Maximum benefit of $2,136)– Before 2011, 6.2% of employee’s first

$106,800 of wages were withheld for social security tax (employer pays matching 6.2%)

– In 2011, 4.2% of employee’s first $106,800 of wages are withheld for social security tax (employer still pays 6.2%)

– In 2011, self-employment tax decreased from 12.4% to 10.4% for first $106,800 of self-employment income

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Personal Income Tax: Personal Income Tax: DeductionsDeductions

• Student Loan Interest– Extension of increased phaseout thresholds to

2011 and 2012• Phaseout if income exceeds $60,000 for individuals

and $120,000 for joint filers; Completely phased out if income is $75,000 or $150,000, respectively

• Without extension, phaseout if income exceeds $40,000 for individuals and $60,000 for joint filers; Completely phased out if income is $55,000 or $75,000, respectively

– Extension of repeal of 60-month limitation on deduction• Without extension, taxpayer could not deduct any

student loan interest after 60 months– Maximum deduction still limited to $2,500

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• Qualified Tuition and Expenses– Deduction for qualified tuition and expenses

extended to 2010 and 2011– Deduction limited to maximum of $4,000 and

subject to phaseout thresholds– Taxpayer must choose either deduction or

credit for education expenses

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• Personal Exemption– Repeal of phaseout extended for 2011 and

2012• Phaseout would reduce exemption amount by 2% for

every $2,500 in excess of the phaseout threshold• 2009 phaseout thresholds were $166,800 for

taxpayers filing single and $250,200 for married taxpayers filing jointly

– Exemption amounts:• $3,650 in 2010; $3,700 in 2011

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• Standard Deduction– Married taxpayers filing jointly will have

standard deduction equal to twice the standard deduction for a single taxpayer for 2011 and 2012

– Single taxpayers allowed a standard deduction of $3,000 (as adjusted for inflation)• $5,700 for 2010; $5,800 for 2011

– Beginning 2013, standard deduction will be $5,000 (as adjusted for inflation) for married taxpayers filing jointly

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• Itemized Deductions (State and Local Sales Tax)– Taxpayer may elect to deduct income taxes or

sales taxes as an itemized deduction• Option extended to 2010 and 2011

– If deducting sales tax, taxpayer may choose to deduct (1) actual sales tax paid or (2) sales tax determined by IRS tables plus sales tax paid on purchase of motor vehicles and watercraft• Election is useful for taxpayers that make large

purchases during the year (i.e. engagement rings) or taxpayers in states without income taxes (i.e. Florida)

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• Itemized Deductions (Mortgage Insurance Premium)– Taxpayer pays premiums for home mortgage

insurance if unable to pay entire downpayment– Deduction for mortgage insurance premiums

extended for 2011

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• Itemized Deductions (Phaseouts)– Repeal of phaseout of itemized deductions

extended to 2011 and 2012– Beginning 2013, if income exceeds phaseout

threshold, itemized deductions reduced by lesser of:• 3% of taxpayer’s income in excess of phaseout

threshold, or• 80% of itemized deductions

– Phaseout threshold is $100,000 (as adjusted for inflation)• Threshold was $166,800 in 2009

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Personal Income Tax: Personal Income Tax: ExclusionsExclusions

• Charitable IRA Distribution– Taxpayer can make distribution of no more

than $100,000 to charitable organization without including such amount in reportable income• Extended to 2010 and 2011

– Taxpayer must be 70.5 years old or older– Distribution counts toward required minimum

distribution

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Personal Income Tax: Personal Income Tax: CreditsCredits

• American Opportunity Credit– Credit extended to 2011 and 2012– Credit equal to 100% of first $2,000 of qualified

tuition and related expenses and 25% of next $2,000• 40% is refundable; 60% is nonrefundable

– Credit applies for student’s first four years of education after high school

– Credit phased out if income is between $80,000-90,000 for individuals and $160,000-180,000 for joint filers

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• Child and Dependent Care Credit– Credit extended to 2011 and 2012– Credit equal to 35% of qualifying child or

dependent care expenses• Maximum credit of $2,100• Subject to phaseout

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• Child Tax Credit– Credit extended to 2011 and 2012– Credit equal to $1,000 per qualifying child

• Beginning 2013, credit will be $500 per qualifying child

• Subject to phaseouts

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• Earned Income Tax Credit– Credit extended to 2011 and 2012 for low

income taxpayers– Maximum credit of $5,666 for taxpayer with

three or more qualifying children; Maximum credit of $457 for taxpayer with no qualifying children• Subject to phaseouts

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• Energy Credit– Credit extended to 2011 for purchase of

nonbusiness energy property (doors, windows, insulation, certain heat pumps, etc.)

– Credit limited to 10% of cost of property, for maximum of $500• 2010 credit was limited to 30% of cost of property for

maximum of $1,500

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Business Income Tax: Business Income Tax: RatesRates

• No changes

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Business Income Tax: Business Income Tax: DeductionsDeductions

• Bonus Depreciation– Extended for qualifying property placed in

service before 2013– If qualified property is purchased after 2007

and placed in service before 2013, additional depreciation equal to 50% of cost of property can be depreciated in first year that property is placed in service

– Bonus depreciation of 100% if property acquired after September 8, 2010 and placed in service before 2012

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Business Income Tax: Business Income Tax: DeductionsDeductions

• Section 179 Expensing– Increase 2012 limitation from $25,000 to $125,000

• Limitation is $500,000 for 2010 and 2011• Limitation is $25,000 for 2013 and later

– 2012 limitation reduced by amount that Section 179 property placed in service during the year exceeds $500,000• No expense if company invests $625,000 in Section 179

property• Investment limitation was $2,000,000 for 2010 and 2011;

investment limitation is $200,000 for 2013 and later

– 2012 limitation amounts of $125,000 and $500,000 to be adjusted later for inflation

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Business Income Tax: Business Income Tax: CreditsCredits

• New Markets Tax Credit– Extended to 2010 and 2011– Taxpayers allowed credit for investment in

qualified community development entities• Credit is 5% of investment for first three years; 6% of

investment for subsequent four years

– National limitations on credit allowed• $3.5 billion for 2010 and 2011

– Unused amounts may be carried forward until 2016

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• Work Opportunity Credit– Hiring deadline extended to December 31,

2011• Original hiring deadline was August 31, 2011

– Employer allowed a credit equal to 40% of each employee’s first $6,000 of wages for employees from certain groups• Groups: qualified IV-A recipients, qualified ex-felons,

designated community residents, qualified SSI recipients

• Credit given for first $3,000 of wages of qualified summer youth employee and first $12,000 of qualified veteran

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• Employer Provided Child Care Credit– Credit extended for 2011 and 2012– Employer allowed credit equal to 25% of

qualified child care expenditures (construction costs, operating costs, contract with child care facility) plus 10% of qualified child care resource and referral expenditures

– Credit limited to $150,000

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Estate & Gift Tax: Estate & Gift Tax: OverviewOverview

• Estate Tax– Enacted in 1916– Taxes accumulated wealth of decedent, less

deductions, and subject to credits– 2009 Statistics:

• 33,515 returns filed (~1.3% of decedents)• 14,713 returns filed subject to tax (~0.6% of decedents)• $20,643,664,000 tax due (~0.98% of federal revenue)

• Gift Tax– Backstop to estate tax: Prevent a person from

avoiding estate tax by disposing of entire wealth during lifetime

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Estate & Gift Tax: Estate & Gift Tax: CreditsCredits

• Estate Tax– Gross estate includes all property owned by

decedent at death– Deductions allowed for debts, liabilities,

administrative and funeral expenses– Deduction for any gifts to charities– Deduction for any distribution to surviving

spouse– Estate tax rate applied against taxable estate– Unified credit against estate tax

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• Gift Tax– Backstop to estate tax– Gifts between spouses are not taxable– Gifts to a recipient worth less than the annual

exclusion are excluded from tax– Gifts not to spouse and in excess of annual

exclusion are subject to gift tax rates– Gift tax reduced by unified credit (not always

equal to estate tax unified credit)

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• 2009 Example– Maximum Estate Tax Rate: 45%– Estate Tax Unified Credit: $1,455,800

• Excludes $3.5 million from estate tax

– Maximum Gift Tax Rate: 45%– Gift Tax Unified Credit: $330,800

• Excludes $1 million from gift tax

– Gift Tax Annual Exclusion: $13,000• If spouse agrees to split gift, exclusion is $26,000

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• 2009 Example– John dies in 2009 with $10 million of assets

• Debts/expenses of $1 million• Left $3 million to his wife, the rest goes to children

– John will have taxable estate of $6 million• Exclude additional $3.5 million for unified credit

– Estate tax: $1.125 million• 45% of $2.5 million

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• 2009 Example– John gives $3 million to his wife and $6 million

to children• Gift to wife is not taxable• If John has 5 children and wife agrees to gift split,

$130,000 of children’s gifts are not taxable– Remaining $5,870,000 subject to gift tax– Exclude additional $1 million for unified credit

– Gift tax: $2,191,500• 45% of $4,870,000

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Estate & Gift Tax: Estate & Gift Tax: 2010 Estate Tax2010 Estate Tax

• 2010 issues before tax bill– NO ESTATE TAX– Maximum gift tax rate is 35%

• Gift tax unified credit applicable exclusion amount remains $1 million

• Annual exclusion remains $13,000

– Assets transferred to heirs do not receive step-up in basis• If decedent bought stock in 1950s for $5/share and

stock is now worth $100/share, heir’s basis in stock remains $5/share.

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• Notable 2010 deaths– Mary Janet Morse Cargill (widowed)

• Heir to family-owned agriculture empire

– Dan L. Duncan (married)• Majority owner of Enterprise Products, an oil and gas

company

– Walter H. Shorenstein (widowed)• Real estate developer

– George Steinbrenner (married)• Owner of New York Yankees

– John W. Kluge (married)• Television industry mogul

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• Notable 2010 deaths– Estimated net worth:

• Cargill – $1.7 billion• Duncan – $9 billion• Shorenstein – $1.1 billion• Steinbrenner – $1.1 billion• Kluge – $6.5 billion• TOTAL NET WORTH: $19.4 billion

– Estate taxes saved: $8.73 billion

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• 2010 Estate Tax Reinstated– Estate has options for 2010

1. DEFAULT: Estate tax under new 2010 rules• Estate tax due• 35% estate tax rate• $5 million applicable exclusion amount• Heirs receive stepped-up basis in assets

2. ELECTION: No estate tax under original 2010 rules• No estate tax due• Heirs receive carryover basis of assets• $1.3 million of additional basis can be allocated to

assets• $3 million of additional basis can be allocated to

assets distributed to surviving spouse

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Estate & Gift Tax: Estate Estate & Gift Tax: Estate TaxTax

• Estate tax reinstated for 2010 at 35%• Estate tax rates reduced for 2011 and

2012– Without passage of bill, rate would be 55%

• Applicable exclusion amount increased to $5 million– 2012 amount to be adjusted for inflation

ESTATE TAX 2009 2010 2011 2012 2013

Rate 45% 35% 35% 35% 55%

Exclusion $3.5M $5M $5M $5M $1M

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Estate & Gift Tax: Estate Estate & Gift Tax: Estate TaxTax

• Portability– If one person dies without using full unified

credit, surviving spouse is able to utilize unused credit• Both spouses must die in 2011 or 2012, unless new

laws extend portability beyond 2012• Surviving spouse able to use unused credit of last

deceased spouse– If wife’s husband dies January 2011, she

remarries October 2011, her new husband dies in February 2012 and she dies in July 2012, she will only be able to utilize unused credit of second husband

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Estate & Gift Tax: Gift Estate & Gift Tax: Gift TaxTax

• Gift tax rate remains 35% for 2010, 2011 and 2012

• Applicable exclusion amount increased to $5 million– 2012 amount to be adjusted for inflation

GIFT TAX 2009 2010 2011 2012 2013

Rate 45% 35% 35% 35% 55%

Exclusion $1M $5M $5M $5M $1M

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Thank YouThank You

1611 Pond Road Suite 300 Allentown, PA 18104 ● 610-391-1800 ● 610-391-1779 (fax)

www.thsLaw.com

R. Nicholas Nanovic, [email protected]

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CIRCULAR 230 CIRCULAR 230 DISCLOSURE DISCLOSURE

To ensure compliance with requirements imposed by the IRS, we inform you that unless specifically provided otherwise in this communication (including any attachments), any U.S. federal tax advice contained in this communication (including any attachments) does not constitute a “reliance opinion” as defined in IRS Circular 230 and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter addressed herein.

TAX RELIEF ACT OF 2010

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