The 2010 Tax Relief acT - Schneider Downs CPAs · 2014-03-17 · Tax Relief, Unemployment Insurance...

Information You Should Know From the Accountants at Schneider Downs

The 2010 Tax Relief acT

January 2011

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Tax Relief Act) (H.R. 4853). This compromise tax bill extends the Bush-era individual, capital gains and dividend tax rates for all taxpayers for two years through 2012. The 2010 Tax Relief Act also provides an “AMT Patch” for 2010 and 2011, and a one-year (2011) FICA payroll tax reduction (from 6.2% to 4.2%) for all workers and self-employed individuals. The bill also provides some economic stimulus provisions, such as 100% bonus depreciation through 2011, and 50% bonus depreciation for 2012, and includes some temporary extensions of certain expiring tax provisions for both individuals and businesses. In addition, in one of the more controversial provisions of the new tax legislation, the 2010 Act provides two-year temporary estate tax relief, which caps the top federal estate tax rate at 35%, and provides a $5 million exemption

from the estate, gift and generation-skipping transfer taxes for 2011 and 2012.

The bill survived strong opposition from many Congressional Democrats since December 6, when President Obama announced his agreement with Republican leaders, until its passage late on December 16. The bill passed by a vote of 81-to-19 in the Senate, but passed by a less-enthusiastic margin in the House: 277-to-148 (63%). By passing the new tax legislation before year-end, the lame-duck Congress finally provided some clarity to the tax situations of individuals and businesses, which might be the spark to getting the economy back on the right track.

A discussion of some of the major provisions of the 2010 Tax Relief Act and how they might affect you or your organization follows.

2010 tax relief act 1

changes affecTing individual TaxpayeRs

Individual Tax Rates

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), effected across-the-board tax rate reductions (the Bush-era tax cuts). The Bush-era tax rate reductions had been scheduled to revert to the rates in effect before 2001 after December 31, 2010. However, the 2010 Tax Relief Act extends all the Bush-era tax cuts for two years, through December 31, 2012.

A comparison of the Bush-era tax rates extended by the 2010 Tax Relief Act to the pre-EGTRRA rates that had been scheduled to take effect in 2011 is summarized in the following table:

Tax Rate Bush-era Rates pre-egTRRa Rates10% 10% N/A

15% 15% 15%

25% 25% N/A

28% 28% 28%

31% N/A 31%

33% 33% N/A

35% 35% N/A

36% N/A 36%

39.6% N/A 39.6%

President Obama and members of the Democratic Congress had proposed to extend the Bush-era tax rates to only individuals earning $200,000 or less, or families earning $250,000 or less), and would have done so by extending the 28% tax bracket to cover these incomes. Under the Democratic plan, individuals earning over $200,000 and families earning over $250,000 would have been subject to tax at the pre-EGTRRA 36% and 39.6% tax brackets. In the end, GOP leaders got President Obama to compromise and extend the Bush-era tax cuts for all

taxpayers for 2011 and 2012.

Taxation of Capital Gains and Dividends

The 2010 Tax Relief Act extends the current tax treatment of qualified capital gains and dividends to 2011 and 2012. Qualified capital gains and dividends currently are taxed at a maximum rate of 15% (0% for taxpayers in the 10% and 15% income tax brackets).

The maximum rate on net capital gains had been scheduled to rise to 20% in 2011 (10% for taxpayers in the 15% bracket), under the sunset rule of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The rate on qualified dividends also would have risen from 15% to be the same as tax rates on regular income, which could have reached as high as 39.6% under the original Obama plan.

Alternative Minimum Tax

The 2010 Tax Relief Act provides an AMT “patch” for 2010 and 2011. The previous AMT patch expired at the end of 2009. If Congress had not provided the 2010 patch, the Congressional Budget Office (CBO) estimated that an additional 21 million households (measured against 2009) would have been subject to the AMT in 2010.

The CBO had also estimated that if the AMT patch was not provided for 2010, about 98% of those taxpayers with incomes ranging from $200,000 to $500,000 would be subject to the AMT, and would pay, on average for that income range, an additional $10,700 in tax.

The 2010 Tax Relief Act increases the exemption amounts for 2010 to $47,450 for individual taxpayers; to $72,450 for married


taxpayers filing jointly and surviving spouses; and to $36,225 for married couples filing separately. Without the AMT patch, the exemption amounts for 2010 and again for 2011 would have dropped to $33,750 for unmarried individuals filing a single return; to $45,000 for married couples filing a joint return and surviving spouses; and to $22,500 for married individuals filing a separate return.

The two-year AMT patch is unusual. Congress has generally provided the AMT patch late in the year for that year. Again, by providing a two-year patch, Congress provides some clarity, in

advance, for individual tax-planning purposes for 2011.

Typical Tax Savings from Reduced Rates

The table below shows the tax savings impact that the reduced 2011 tax rates will have on taxpayers at various levels of income, marital and family status. The tax savings are substantial for all taxpayers.

Individuals should combine typical tax savings shown above with the amount of their payroll tax cut (described below) to

2011 Taxable yearsummary of Taxes Owed (Refunded) on Typical Tax Returns filed for:

Taxable income level

full expirationof Bush-era

Tax cuts

2010 Taxcompromise

plan 2011 Taxsavings

Single parent, one child, $25,000 ($901) ($1,856) $955

Married couple, three children, $45,000 $1,028 ($1,510) $2,538

Married couple, two children, $50,000 $2,833 $690 $2,143

Married couple, two children, $85,000 $7,235 $5,385 $1,850

Single, no children, $60,000 $8,255 $7,500 $755

Single, no children, $150,000 w/ investment income (A) $28,340 $25,071 $3,269

Married couple, two children, $150,000 w/ investment income (A) $21,602 $17,800 $3,802

Married couple, two children, $300,000 $76,616 $64,971 $11,645

Married couple, no children, $420,000 w/ investment income (B) $106,815 $95,554 $11,261

Married couple, no children, $1,000,000 w/ investment income (C) $293,106 $231,900 $61,206

Retired couple, $60,000 w/ investment income (D) $3,444 $768 $2,676

Source: Tax Foundation - Fiscal Fact No. 251, October 14, 2010

Income Assumptions:(A) $135,000 in wages, $15,000 in LTCG(B) $400,000 in wages, $20,000 in LTCG(C) $700,000 in wages, $200,000 in LTCG, $100,000 in dividends (D) $10,000 in wages, $5,000 in LTCG, $10,000 in dividends, $25,000 in SS Benefits, $10,000 in 401(k)


determine the total immediate impact that the 2010 Tax Relief Act will have on them.

Temporary Payroll Tax Cut

The 2010 Tax Relief Act cuts the employee share (but not the employer’s share) of the OASDI portion of Social Security taxes from 6.2% to 4.2% for wages earned in calendar-year 2011 up to the taxable wage base of $106,800. The reduction also applies to self-employed individuals, who will pay 10.4% OASDI tax vs. 12.4% on self-employment income up to the $106,800 income threshold.

As noted above, an employer’s share of the OASDI tax will remain at 6.2%.

Notably, the 2% FICA payroll tax reduction applies to all wage earners regardless of income level. There is no phaseout of the benefit for high wage earners or successful self-employeds. Accordingly, those wage earners or self-employeds earning at or above the FICA earnings cap of $106,800 for 2011 will have an additional $2,136 (2% x $106,800) of take-home pay or business cash flow in 2011. All totaled, the FICA payroll tax holiday is projected by the CBO to put $111 billion of cash flow into the U.S. economy.

Other Individual Provisions

Some other individual tax provisions that were to be repealed under EGTRRA’s sunset rules but have been extended by the 2010 Tax Relief Act for 2011 and 2012 are:

· Itemized Deduction Limitation – the 2010 Tax Relief Act extends full repeal of the itemized deduction limitation for 2011 and 2012.

· Personal Exemption Phaseout (PEP) – the 2010 Tax Relief Act extends the full repeal of the PEP for 2011 and 2012.

· Marriage Penalty Relief · $1,000 Child Tax Credit (was to drop to $500 in 2011 if

not extended)· Enhanced Earned Income Tax Credit· Adoption Credit or Exclusion· Dependent Care Credit· Employer-Provided Child Care· Deductible Mortgage Insurance Premiums· American Opportunity Tax Credit· Educational Assistance Exclusion· Student Loan Interest Deduction· $2,000 Coverdell Educational Savings Accounts

Individual Tax Extenders

The 2010 Tax Relief Act also extends a number of temporary individual tax incentives that expired at the end of 2009. These incentives are extended for 2010 and 2011:

· State and local sales tax deduction· Higher education tuition deduction· Teachers’ classroom expense deduction· Charitable contribution of IRA proceeds· Charitable contributions of appreciated property for

conservation purposes

Provisions for Business Investment and Job Creation

The 2010 Tax Relief Act includes several provisions to encourage businesses to order and invest in new machinery and equipment in hopes of creating jobs for unemployed workers.

100% Bonus Depreciation

One of these business investment incentives is the allowance of a 100% write-off (100% bonus depreciation) of the cost


of investment in qualified property made after September 8, 2010 and before January 1, 2012. Certain long-production-time property and transportation property is eligible for 100% expensing if placed in service before January 1, 2013. In addition, investments in certain noncommercial aircraft ordered before January 1, 2012 and placed in service before January 1, 2013 qualify for the 100% bonus depreciation deduction.

Generally, to qualify for 100% bonus depreciation, the property must be new (i.e., the original use begins with the taxpayer) tangible personal property, computer software or qualified leasehold improvements. Real property is not subject to the bonus depreciation rules.

The 100% bonus depreciation provision is the most expansive cost-recovery provision in history. It is not limited in use to either small or large businesses, and there are no caps or limitations on the dollar amount of investment in qualified property. If the bonus depreciation deductions are large enough to create net operating losses (NOLs), the NOLs can be carried back to recoup taxes paid in prior years, or carried forward to help manage the level of taxes paid in future years.

50% Bonus Depreciation

The 2010 Small Business Jobs Act had previously extended the 50% bonus depreciation rules for all of 2010. The 2010 Tax Relief Act now extends the 50% bonus depreciation provision for qualified property placed in service after December 31, 2011, and before January 1, 2013 (i.e., in the year following the availability of 100% bonus depreciation). Thus 50% bonus depreciation will be available in 2012 for those businesses that may come late to the party of economic recovery. Despite the generous 100% bonus depreciation provision for a portion of 2010 and for all of 2011, some businesses may still find themselves in an economic position where they cannot make the investment to take advantage of its benefits. With a backup year of 50% bonus depreciation in 2012, those businesses that may be just pulling out of their economic hardship in late 2011, or in 2012, will still be able to avail themselves of some tax incentive to help finance their recovery and incentivize hiring.

Both the 100% and 50% bonus depreciation will be allowed in full for alternative minimum tax (AMT) purposes. Also, if bonus depreciation is claimed, no AMT adjustment is required on the regular MACRS deductions either. It should also be noted that a corporation may make an election to forgo bonus depreciation and instead claim certain research credit or AMT credit carry-forwards. This election may benefit certain corporations with NOL carry-forwards.

Section 179 Expensing

For taxable years beginning in 2012, the 2010 Tax Relief Act provides for a $125,000 limit (indexed for inflation) and a $500,000 investment limit, also indexed for inflation.

The 2010 Small Business Jobs Act increased the IRC Section 179 dollar and investment limits to $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. Also,


under the 2010 Small Business Jobs Act, a taxpayer can elect up to $250,000 of the $500,000 IRC Section 179 deduction limit (subject to the $2 million investment limit) for qualified leasehold improvements property, qualified restaurant property and qualified retail improvement property for any tax year beginning in 2010 and 2011. Unfortunately, the 2010 Tax Relief Act does not extend this treatment to 2012.

Unlike bonus depreciation, which applies to only new qualified property, Section 179 expensing applies to new or used property. Accordingly, the increased Section 179 expensing limits can assist smaller businesses in acquiring necessary machinery and equipment for their trade or business on a tax-favored basis. Section 179 expensing also applies to off-the-shelf computer software packages if placed in service before 2013.

Research Tax Credit

The research tax credit expired at the end of 2009. The 2010 Tax Relief Act renews the credit for two years, through December 31, 2011 for qualified research and experimental expenses paid or incurred after December 31, 2009. President Obama had requested Congress to make the credit permanent.

Taxpayers can choose between calculating their research credit under a formula that provides a 20% credit rate for R&D expenditures over a certain base, or a formula that provides a

14% credit in excess of a base amount. President Obama also had suggested that Congress increase the 14% credit to 17%. However, in the 2010 Tax Relief Act, the 14% rate remained unchanged.

The temporary two-year extension of the research credit is unusual in that an extension has been granted on an annual, and often on a retroactive, basis, since the credit was created in 1981. Because of the state of the economy, Congress wanted to provide clarity that such credit would be available in 2011 for research expenditures.

Exclusion of Gain on Small Business Stock

The 2010 Small Business Jobs Act provided an enhanced 100% exclusion of gain from qualified small business stock (QSBS) acquired after September 27, 2010 and before January 1, 2011, and held for at least five years. Unfortunately, due to the delayed passage of the 2010 Jobs Act, taxpayers had only a short window of opportunity to take advantage of the new 100% extension.

The 2010 Tax Relief Act extends the 100% exclusion for one more year, for stock acquired before January 1, 2012. Accordingly, with the 100% exclusion, none of the gain on qualifying sales or exchanges of small business stock is subject to federal income tax.


To qualify as small business stock:• The stock must be issued by a C corporation;• 80% of its assets must be invested in the active conduct

of a trade or business;• The corporation must have assets of $50 million or less

when the stock is issued;• Qualified stock must be held for more than five years; and• The amount taken into account under the exclusion

is limited to the greater of $10 million or ten times the taxpayer’s basis in the stock.

Any taxpayer, other than a C corporation, can hold stock that is subject to the exclusion. In addition, the excluded gain is not treated as a tax preference item for AMT purposes, so none of the gain will be subject to AMT.

Any business enterprise that expects substantial appreciation in its value over the next five or more years should consider raising any new capital using QSBS during 2011. Although QSBS can only be issued by a C corporation, the major disadvantage of operating as a non-pass-through “C” corporation–double taxation–is virtually eliminated, since no regular or AMT tax will be imposed on an individual’s later sale or exchange of the QSBS.

Business Tax Extenders

The 2010 Tax Relief Act extends a number of business tax provisions that expired at the end of 2009. These business tax extenders are generally extended for two years for 2010 and 2011. The following business tax extender provisions are included in the 2010 Tax Relief Act:

· 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and qualified retail improvements;

· Railroad track maintenance credit;· Mine rescue team training credit;· Election to expense mine safety equipment;· Employer wage credit for employees who are active-duty

members of the uniformed services;· 7-year recovery period for motorsports entertainment

complexes;· Indian employment tax credit;· New markets tax credit;· Charitable incentives:

- Enhanced charitable deduction for contributions of food inventory;

- Enhanced charitable deduction for contributions of book inventories to public schools;

- Enhanced charitable deduction for corporate contributions of computer inventory for educational purposes; and

- Basis adjustment to stock of S corporations making charitable contributions of property.

· Special expensing rules for certain film and television productions;

· Expensing of environmental remediation costs;· Deduction allowable with respect to income attributable

to domestic production activities in Puerto Rico; · Modification of tax treatment of certain payments to

controlling exempt organizations;


· Treatment of certain dividends of regulated investment companies;

· RIC qualified investment entity treatment under FIRPTA;· Exceptions for active financing income;· Look-through treatment of payments between related

controlled foreign corporations under foreign personal holding rules;

· Empowerment zone tax incentives;· Tax incentives for investment in the District of Columbia;· Temporary increase in limit on cover over of rum excise

taxes to Puerto Rico and the Virgin Islands;· American Samoa economic development credit;· Work opportunity credit (veterans and disconnected

youth removed from targeted group);· Qualified zone academy bonds; and· Mortgage insurance premiums.

Energy Incentives

The 2010 Tax Relief Act temporarily extends a number of business energy tax incentives for varying periods of time (one or two years). These business energy incentives are:

• Incentives for biodiesel and renewable diesel;• Credit for refined coal facilities;• New energy-efficient home credit;• Excise tax credits and outlay payments for alternative fuel

and alternative fuel mixtures;• Special rule for sales or dispositions to implement FERC

or state electric restructuring policy for qualified electric utilities;

• Suspension of limitation on percentage depletion for oil and gas from marginal wells;

• Extension of grants for specified energy property in lieu of tax credits;

• Extension of provisions related to alcohol used as fuels;

• Energy-efficient appliance credit; and• Alternative fuel vehicle refueling property.

IRC Section 25C residential energy property credit for individuals is extended but with some limitations and modifications.

IRC Section 25C credit provides tax benefits for individuals who make energy efficiency improvements to their residences. For 2009 and 2010 property, the credit amount is 30% of the sum of expenditures for qualified energy efficiency improvements and property, such as furnaces, water heaters, insulation materials, exterior windows and doors, and other items. The credit is limited to a lifetime maximum credit of $1,500 for 2009 and 2010 property. The 2010 Tax Relief Act extends the Code Section 25C credit through 2011. However, under the new law, the credit reverts to its pre-2009 Recovery Act provisions. (The 2009 Recovery Act had tripled the $500 credit to a $1,500 credit.)


Federal Gift and Estate Taxes

The 2010 Tax Relief Act provides for a significant temporary reduction in estate and gift taxes that will apply during 2011 and 2012.

A new $5 million exemption, together with a 35% tax rate, applies to estates of those dying in 2011 and 2012, as well as to gifts and generation-skipping transfers made in those years. Then, in 2013, the pre-EGTRRA law will return with a $1 million exemption and a maximum 55% tax rate.

Under EGTRRA, from 2002-2009, the estate tax rate decreased from 55% to 45%, and the exemption amount increased from $1 million to $3.5 million, and in 2010, the estate tax was repealed and replaced by a modified carryover basis regime. However, the estate tax was scheduled to return in 2011 with a $1 million exemption and a 55% tax rate if Congress failed to act.

One significant change to the gift and estate tax rules made by the 2010 Tax Relief Act is the unification of the gift and estate tax. In 2009, the lifetime gift tax exemption was set at $1 million and the estate tax exemption was $3.5 million. Under these rules, you could give away $1 million during lifetime (without using annual exclusions) and an additional $2.5 million at death without incurring estate tax. The 2010 Tax Relief Act unifies this exemption in 2011 and 2012 and allows individuals to gift during life and/or at death a total of $5 million. In other words, there is no distinction drawn between transfers during life or at death for 2011 and 2012.

Accordingly, the 2010 Tax Relief Act offers an opportunity to make considerable tax-free gifts during this temporary two-year period.


The 2010 Tax Relief Act has also resolved the uncertainty for estates of decedents dying in 2010 by giving them a choice between no estate tax, but with carryover income tax basis, or the imposition of an estate tax with a $5.0 million exemption. With respect to those executors who choose to pay federal estate tax, the executor is essentially electing to have the 2010 Tax Relief Act apply in 2010. If this election is made, any applicable estate taxes are paid, and the beneficiaries’ tax basis in the acquired property is stepped up or down to the fair market value of the property on the decedent’s date of death. The 2010 Tax Relief Act provides that estate tax returns to be filed for decedents dying in 2010 are not due until 9 months after the date of enactment of the 2010 Tax Relief Act

In 2009, the generation-skipping transfer (“GST”) tax, as amended under EGTRRA, was set at 45% with a $3.5 million exemption amount. Like the estate tax, the GST tax was repealed in 2010 and was set to return in 2011 at a rate of 55% with an exemption amount of $1 million.

Under the 2010 Tax Relief Act, instead of a repeal of the GST tax for 2010, the GST tax rate is set at 0% with a $5 million exemption. While this difference for 2010 may not seem significant on its face (no tax as compared to a 0% tax rate), this language makes clear that a donor can give property to a grandchild either outright or in trust without paying a GST tax (although subject to the 35% gift tax on gifts over $1 million). Also, because the 2010 GST tax rate is 0%, the $5 million exemption can be preserved for subsequent years, since it does not have to be allocated to reduce a tax rate of 0%.

An additional issue included in the 2010 Tax Relief Act is the introduction of the concept of portability of the estate tax exemption amount. For example, in 2009, the estate tax exemption amount was $3.5 million per person, or $7 million per couple. In order for a couple to take advantage of the full

$7 million exemption, each spouse had to separately use his/her $3.5 million exemption. If the first spouse died with only $1 million assets, then $2.5 million of estate tax exemption would be lost. However, under the 2010 Tax Relief Act, the surviving spouse, upon proper election by the spouse’s estate, may use any of the predeceased spouse’s unused estate tax exemption. This portability election is only available for estates in 2011 and 2012.


Although the 2010 Tax Relief Act offers substantial estate, gift and GST tax savings, the temporary nature of the tax cuts raises substantial uncertainty regarding the future of the U.S. transfer tax regime and offers little assistance or guidance for longer-term estate planning.

The Cost of Tax Relief

The Joint Committee on Taxation estimates the total cost of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 at $857 billion over ten years. Included in the total cost is $56.51 billion for the temporary extension of unemployment benefits for millions of unemployed workers. The chart to the right details the $801 billion cost of the tax provisions of the 2010 Tax Relief Act.

Unfortunately, none of the cost of this massive tax relief bill is paid for through spending cuts in other areas. Some of the bill’s provisions such as the extension of the Bush-era tax cuts are exempt from the pay-as-you-go provisions, and others, like the extended unemployment benefits and the 2011 payroll tax cut, are designated as emergency spending. Thus, all of the bill will add to the growing budget deficit.

It remains to be seen whether the 2010 tax compromise legislation will have the intended result of increasing demand for goods and services, increasing investment in plants and equipment and creating new jobs, or will be tagged by some of it’s critics as another wasteful failed stimulus measure: Let’s hope for the best.

© 2011 Schneider Downs & Co., Inc.This content cannot be reproduced or distributed without the consent of Schneider Downs & Co., Inc. To learn more about Schneider Downs, visit www.schneiderdowns.com.


schneider downs & co., inc. thanks Ron Kramer, director of specialized Tax services, for authoring this publication and other tax

and marketing personnel who contributed.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be

imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

If you have any questions related to the information contained within this document, please contact one of the following Schneider Downs shareholders:

Mark E. Cobetto(614) [email protected]

Paul M. Matvey(412) [email protected]

Daniel P. Phillips(412) [email protected]

Gennaro J. DiBello(412) [email protected]

Susan M. Kirsch(412) [email protected]

Mary D. Richter(412) [email protected]

Jeffery A. Wlahofsky(412) [email protected]

Kathy D. Petrucci(614) [email protected]

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cOlumBus

You may also contact your Schneider Downs representative.

Don A. Linzer(412) [email protected]

Karl W. Kunkle(412) [email protected]

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