Taxation Law

Taxation Law

Section Blog

Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010

by Lisa M. Rico , posted Thu, Jan 6, 2011 9:04 AM

Welcome to the Taxation Law Section's blog.  We will be using the blog as one method providing information on recent tax law developments to our section members.  We are pleased to provide our members with our first post that provides an overview of the recently enact federal tax law.

On December 16, 2010, Congress passed, and on December 17, 2010 the President signed into law the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (the "Act").  The Act extends the so-called "Bush era tax cuts" until the end of December, 2012. The Act affects various areas of federal taxes, including but not limited to income, transfer and payroll taxes.  Unfortunately, all of the provisions of this new tax law are only effective for two years.

In the income tax area, the Act extends the reduction of the federal income tax brackets to 15%, 25%, 28%, 33% and 35%, which were slated to return to 15%, 28%, 31%, 36% and 39.6%, on January 1, 2011 as well as the long term capital gains rate and qualified dividends rate at 15%.

In the transfer tax area, the Act includes significant changes to the estate, gift and generation-skipping transfer tax laws.

For 2010, the new legislation changes the estate, gift and generation-transfer tax laws as follows:

  • the estate tax exemption amount (the amount that can pass tax free on an individual's death) is increased to $5,000,000;
  • the maximum estate tax rate is reduced to 35%;
  • the modified carryover basis rules have been repealed;
  • the estate tax applies to decedents dying in 2010, unless the estate's executor elects to have the federal estate tax law that has been in effect in 2010 (i.e., no estate tax and a modified carryover basis);
  • the gift tax applicable exclusion amount remains at $1,000,000; and
  • the generation-skipping transfer tax is reinstated with an exemption amount of $5,000,000, however, the tax rate for generation-skipping transfers made in 2010 is zero.

Beginning in 2011, the estate, gift and generation-skipping transfer tax will each have a $5,000,000 exemption amount (adjusted for inflation after 2011) and the maximum tax rate will be 35%.

The Act also introduces a new estate planning tool in the estate and gift tax area, which is portability.  Portability allows a decedent's unused exemption amount to be transferred to the surviving spouse. Specifically, for estates of decedents dying after 2010, the decedent's executor may elect to transfer any of the decedent's unused exemption amounts to the decedent's surviving spouse.   Portability applies only to the estate and gift tax exemptions.  It does not allow for portability of a deceased spouse's generation-skipping transfer tax exemption.  Also, while an individual's exemption will be indexed for inflation after 2011, the unused exemption of a deceased spouse transferred to the surviving spouse will not be indexed for inflation.

In the payroll tax area, an employee's social security portion (OASDI) of the FICA will be reduced to 4.2% from 6.2% for 2011.  Similarly, an individual's OASDI portion of the self-employment tax will be reduced to 10.4% from 12.4% for 2011.

The Act extends the alternative minimum tax (AMT) patch as well as extends through 2011 the provision that excludes from gross income (up to $100,000 per taxpayer, per year) distributions from an IRA made to a charity.  
The above only provides a brief overview of some change brought about by the Act.  For a detailed description of the above changes and of other changes made by the Act, I refer you to the Act and the Joint Committee on Taxation's Technical Explanation of the Act.

Link to the Act:  http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf.
Link to the Joint Committee on Taxation's Technical Explanation of the Act:  http://www.jct.gov/publications.html?func=startdown&id=3716.

The Act should be considered carefully as it will affect tax planning going forward (at least for the next two years).

Tax advisors must also keep in mind that states, particularly in the estate tax area, have their own laws.  For example, while the federal estate tax laws will now affect only decedent's who dies with estates of $5,000,000 or more as well as providing more flexibility with the inclusion of the portability provisions, Massachusetts has not changed its estate tax laws. The Massachusetts estate tax continues to be imposed on estates of Massachusetts' decedents dying estates of $1,000,000 or more.

We hope this helps you in your practice.

Lisa M. Rico, Taxation Law Section Chair

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