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

On Dec. 16, 2010, Congress passed -- and on Dec. 17, 2010, the president signed into law -- the Tax Relief, Unemployment Insurance Reauthorization 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 individual income tax brackets to 15 percent, 25 percent, 28 percent, 33 percent and 35 percent, which were slated to return to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent, on Jan. 1, 2011, as well as the maximum long-term capital gains rate and qualified dividends rate at 15 percent.

The one-year (2010) repeal of the personal exemption phase-out and itemized deduction limitations have been extended through 2012. 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.

In the business income tax area, the act increases 50 percent bonus depreciation to 100 percent for qualified investments made after Sept. 8, 2010, and before Jan. 1, 2012, and continues 50 percent bonus depreciation for qualified property placed in service after Dec. 31, 2011 and before Jan. 1, 2013.

The act also makes 2010 Small Business Jobs Act increased 179 dollar and investment limits to $500,000 and $2 million for tax years beginning in 2010 and 2011, as well as providing for a $125,000 dollar limit and $500,000 investment for tax years beginning in 2012, but sunsetting after Dec. 31, 2012 (both amounts indexed for inflation).

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

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 million;
  • The maximum estate tax rate is reduced to 35 percent;
  • The modified carryover basis rules have been repealed;
  • Executors, however, may elect out of the estate tax and have the modified carryover basis rules apply;
  • The gift tax applicable exclusion amount remains at $1 million; and
  • The generation-skipping transfer tax is reinstated with an exemption amount of $5 million; 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 million exemption amount (adjusted for inflation after 2011) and the maximum tax rate will be 35 percent.

The act also introduces a new estate planning tool in the estate and gift tax area -- 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 transferred unused exemption of a deceased spouse will not be indexed for inflation.

While these are important federal tax changes, 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 decedents who die with estates of $5 million 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 million or more.

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 ( www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf) and the Joint Committee on Taxation's technical explanation of the act (www.jct.gov/publications.html?func=startdown&id=3716).

Also, please visit the Taxation Law Section's blog on the section's webpage at www.Massbar.org/Member-groups/Sections/Taxation-law for additional information about the new act and other recent tax developments.

©2014 Massachusetts Bar Association