We have all heard about the "Bush Tax Provisions" that were going to expire at the end of 2010 and how income taxes would go up if nothing were done. Congress did do something that fixed the immediate problem and also fixed a number of other items in the tax code, including RE-INSTATING the Federal Estate Tax retroactive to the beginning of 2010. This page attempts to summarize several of the important aspects of that new tax law that was signed into law in mid-December, 2010, as follows:1...Retaining Prior Tax Rates
2...Child Tax Credit
3...Reduced Dividend and Capital Gains Rates
4...Relief of Alternative Minimum Tax
5...Small Business Equipment Write-offs
6...Payroll Tax Reduction (for Employees)
7...Non-Business Energy Credits
8...Estate Tax Changes--Major Changes here
9...Small Business Stock Exclusion
Other provisions that are in the New December 2010 Act that are not explained below include:
***The Hope Tax Credit for the Education Credit was extended
***The Deduction for student loan interest has been extended with changes
***Itemized deductions and personal and dependency exemptions will not be reduced for higher income taxpayers
***An exclusion for up to $5,250 for employer-provided education assistance
***Increased the earned income tax credit for those with 3 or more children
***Increased the adoption credit and the employer-paid adoption exclusion
***Re-instated the deduction for state and local sales tax in lieu of income tax
***Re-instated the $250 above-the-line deduction for school teachers
***Increased contribution limits and carryforward period for capial gain property
***Re-instated the tax-free contributions to charity from an IRA and lets Taxpayers to treat a January 2011 contribution against 2010 taxes
***Made mortgage insurance premiums deductible as qualified interest payments
The old individual income tax rates were 28%, 31%, 36% and 39.6% at various levels of income. President Bush had reduced those rates to 25%, 28%, 33% and 35% but those reduced rates were set to expire on December 31, 2010. The new law in December, 2010, extends the Bush tax rates into future years. Thus, the reference to the former Bush Tax Cuts has now become the extended new tax rates that will continue for two more years.
2...Child Tax Credit
The prior law provided a Child Tax Credit of $1,000 for each qualifying child under the age of 17. The credit was to run through 2010 and then drop to a credit of only $500 in 2011.
The new December, 2010 law extends the full $1,000 credit into the future but only through 2012.
3...Reduced Dividend and Capital Gains Rates
Dividends are the distributions of property made by a corporation to its shareholders out of its after-tax earnings and profits. Capital Gains are the increases in value of an investment after holding it for a period of time.
The most recent rates for Dividends and Capital Gains have been a maximum of 15% and that rate was scheduled to change for 2011. The new Dividend rate was going to be the same as ordinary income tax rates and the tax on Capital Gains was going to rise to 20%.
The new law of December, 2010 keeps the 15% tax rate for Dividend Income and Capital Gain income for another two years until the end of 2012.
4...Relief of Alternative Minimum Taxation
The Alternative Minimum Tax (AMT) is a means whereby the Government can charge the Taxpayer for more tax than the normal tax rates call for. The original purpose of the AMT was to require those taxpayers that took advantage of special tax breaks, such as 15% tax on Dividends, etc, would still incur a certain minimum level of taxation. The problem is that the AMT has been extended so that many middle income Taxpayers have been faced with higher taxes due to the AMT.
THe new law extends that present level of the AMT rather than expanding it to the level that would have taken place in 2011. The AMT exemption amounts are $72,450 for 2010 but the new law sets the exemption amount at $74,450 (an increase of $2,000) for the next two years for those filing as Married with Joint Returns. This is some relief but there will still be a number of Taxpayers that will end up paying the AMT tax on their returns.
5...Small Business Equipment Write-offs
The "Additional First Year Depreciation" under IRC Sec 179 has been a great benefit for small businesses by allowing them to write off the full costs of new equipment used in the business. It even applies to vehicles if they are large vehicles with Gross Vehicle Weight in excess of 6,000 pounds. It does not, however, apply to passenger vehicles.
The allowable write off amount began in the 1990s at only $10,000 but increased to $500,000 which was available in 2010. Beginning in 2012, the amount is to revert to only $25,000 as being allowable under IRC Sec 179.
For 2010 and 2011, the total amount that can be immediately expensed is set at $500,000 and for 2013, it will revert back to only $25,000. Additional amounts are allowable for the Gulf Opportunity Zone or GO Zone in which much South Louisiana is in. Also, the definition of qualifying proprty for 2010 and 2011 has been temporarily expanded to include qualified leasehold improvements, qualified restaurant property and qualified retail improvement property. Most of the qualified property must be property that would have a useful life of 20 years or less which could preclude buildings and permanent structures.
Although the above provision is applicable to grocery stores as a retail improvement, it does NOT apply to enlargements of a store but only to the improvements of existing stores. Any movable equipment purchased for the store would qualify for the full write off provisions.
6...Payroll Tax Reduction (for Employees)
The normal payroll taxes to be witheld from employees is 7.65% which is also to be matched by the employer for a total of 15.3% to be sent to the IRS. For self employed Taxpayers, they must pay the full 15.3% in their capacity as the employee and employer combined. These taxes are applicable on the first $106,800 of taxable income.
The new law gives the employee and the self employed a break for 2011 in that the rate is reduced by 2 percentage points for the withholding to be only 5.65% (instead of 7.65%) for employees and the Self Employed will only owe 13.2% (instead of 15.3%). This provision is effective for wages and income in 2011 beginning Jan 1, 2011 but it is not retroactive for 2010 and it is only for 2011 with no continuation into future years.
Note, this provision does not reduce the Employer's share of taxes so the Employer gets no tax break--only the Employee.
7...Non-Business Energy Credits
The present law expiring at the end of 2010 provides a credit for the purchase of non-business (personal residence) qualifed energy efficiency improvements, (1) that meets certain guidelines, (2) that is installed in the Taxpayer's personal residence, (3) with the Taxpayer being the original user of the improvements and (4) that can reasonably be expected to last 5 years. The credit, a direct reduction of the taxes due, is 30% of the cost of the improvements up to a total credit of $1,500. The items that qualify include (a) insulation materials, (b) exterior windows, (c) metal or asphalt roofs, (d) an electric heat pump water heater, (e) a high efficiency central air conditioner, and (f) a natural gas, propane or oil water heater. HOWEVER, to qualify for the credit, the Taxpayer MUST obtain a certification from the manufacturer that the items to be installed qualify under the law. Simply installing off the shelf items that may not qualify will not allow you to take the credit unless you can get a certification that the items complies with the IRS requirements.
The December, 2010 new law extends this credit for one year through 2011.
8...Estate Tax Changes--Major Changes Here
PRIOR LAW
Under the law up until the end of 2009, there was a Federal Estate tax on estates up to $3.5 million per person. That would be $7 million for a couple since they would each have had a full exempt amount. The highest tax applied above those exemption figures was 45% of the remainder of the estate at current fair market value for the assets included in the estate.
Under those rules, a person who inherited from a decedent took on a new cost basis of the property inherited just as though he had purchased it for the fair value of the property on the date of death, regardless of what the Decedent had paid for it. This provision has normally been referred to as a “step up in basis” because it allowed the heir to take a higher and more current cost basis for determining gain or loss when he disposed of the property in the future.
Since Congress had not previously corrected their lack of activity in this area, we have had NO Federal Estate Tax during 2010. Further, the Estate Tax was scheduled to return in 2011 with only a $1 million exemption per Decedent with the highest estate tax rate of 55%.
The older “stepped up basis” rules were done away with beginning in 2010 and, with some modification, the heir would take the property at the same cost basis as the Decedent. The modification did allow a minimum step up of $1.3 million in basis for an heir or an additional $3 million (to $4.3 million) for a surviving spouse.
A number of years ago, the exemption for taxation of gifts was the same as the exclusion for estates. However, that was changed in 2004 and the amount that can be given away over a lifetime without paying gift taxes has been only $1 million and the tax applied to the taxable gifts was 45%. The tax basis or “cost” of property received by a gift has always been a “carryover basis” or the same cost basis that the donor had in the property. Thus, the recipient could incur unanticipated taxes if he sold the donated property soon after acquiring it if the donor had purchased it at a low cost.
The lifetime exemption is not to be confused with the annual exclusion in which a person can give away up to $13,000 to as many people as he wants without the need for filing a gift tax return. Thus, a couple could give away $26,000 to a number of people without affecting their lifetime exemption.
NEW DECEMBER, 2010 CHANGES
First, the Estate Tax provisions that we all thought would be zero for all of 2010 are now set aside and there IS a Federal Estate Tax Law in effect retroactive to the beginning of 2010. The exclusion beginning January 1,2010 is $5 million and the highest tax bracket is 35%.
Second, the Gift Tax Exemption for 2010 remains at $1 million but with the highest tax rate of 35%. Beginning in 2011, the exclusion will be the same as the Estate Tax Exclusion of $5 million with the highest tax rate of 35%. The cost basis rules under the new law are also different. Primarily, the above provisions for the carryover basis as modified for the $1.3 or the additional $3 million spousal adjustment is no longer the default provision. The new provision goes back to the older procedure of a full stepped up basis using the fair market value as of the date of death.
Notwithstanding the above, an Executor can make an election for the Decedent who dies in 2010 not to accept the new law but to follow the law that was in place before passage of this new law. That would be that there would be no Federal Estate Tax but the carryover basis rules would apply with the $1.3 and $3.0 million adjustments. Thus, it can make a big difference as to whether an estate should pay the tax and get a stepped up basis or to forego the taxation but not get a partial step up in basis.
DUE DATE FOR FILING
Historically, the due date for filing a Federal Estate Tax Return was 9 months after the date of death. Considering that the law was passed December, 2010, there is a revised due date which is 9 months after the date of enactment for (1) filing the estate tax return and (2) making payment of estate taxes due. Additional regulations will be issued telling us how to make the election to adopt the “no estate tax” provisions and the carryover basis rules that would have been applicable had this new law not been passed.
9...Small Business Stock Exclusion
Investors have been able to exclude 50% of any capital gain from the sale or exchange of qualified small business stock (less than $50 million of assets) issued after August 10, 1993 that was held a minimum of five years. A prior act temporarily increased the exclusion during 2010 to 100% for stock acquired after September 17, 2010 and before January 1, 2011 and held for at least 5 years.
The new December 2010 act extends the 100% exclusion for one year--to qualifying stock acquired before January 1, 2012 and held for more than 5 years.
======================== WARNING ======================= AND DISCLAIMER This information is provided for the reader's benefit in becoming familiar with the legal matters discussed. Your particular facts may be different from the points above. You should not rely on the above data without consulting a attorney or CPA to discuss the specific facts of your case and the law of your state. ==========================================================
If you live in Louisiana and want to talk about your situation, please call me at:
Marvin E. Owen
Attorney-CPA
3036 Brakley Drive
Baton Rouge, La 70816
ph 225-292-0099
toll-free 1-888-292-0116
e-mail marvin@meocpa.com
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