Congress Gives
Taxpayers a Holiday Present
Facing the expiration of many significant tax provisions
within the Internal Revenue Code, Congress passed a wide-ranging tax bill
dealing with income tax rates, tax credits and deductions, Social Security tax
rates, estate tax, and a variety of other tax-related provisions. Assuming the President signs the legislation,
which he is expected to do, the following links provide an overview of the new
tax law that will impact all taxpayers subject to United States taxes.
Bond and Other
Provisions Related to Disaster Relief
For any
questions related to this recently passed legislation, please contact the Ice Miller Tax Group.
Tax
Provisions Related to Individual Taxpayers
·
Ordinary Income Tax
Rates: The primary motivation for the tax bill was
the expiration of the Bush tax cuts. If
no action was taken by Congress, the income tax rates for individuals would
have jumped to their pre-2002 levels.
The lowest federal income tax bracket for ordinary income would have
been 15 percent ranging up to 39.6 percent.
With the newly passed legislation, the current tax rates were extended
for another two years, with the ordinary income tax rates ranging from 10
percent to 35 percent.
·
Dividend and Capital
Gain Tax Rates: Starting Jan. 1, 2011
the highest capital gain tax rate would have increased from 15 percent to 20
percent, while the tax on dividends would have increased from 15 percent up to
39.6 percent. With the passed
legislation, the highest tax rates for both dividends and capital gains remain
at 15 percent, and no tax imposed on dividends and capital gains for taxpayers
below the 25 percent tax bracket for the next two years.
·
Decrease in Social
Security Tax: For 2011, employee’s Old
Age Survivors Disability Insurance (OASDI) portion of the Social Security tax
rate is deceased from 6.2 percent to 4.2 percent and the self-employment tax
rate is similarly reduced from 12.4 percent to 10.4 percent.
·
Repeal of Phase-out for
Personal Exemptions and Overall Limitation of Itemized Deductions: The legislation extended the repeal of the
phase-out for the personal exemption of higher income taxpayers as well as the
elimination of the reduction in itemized deductions for taxpayers with adjusted
gross income in excess of a threshold.
·
Marriage Related
Provisions: The amount of the standard deduction for
married individuals filing jointly was kept at twice the amount of unmarried
taxpayers filing a single return.
Moreover, the size of the 15 percent tax bracket for married individuals
was similarly kept at twice the amount of the size of the 15 percent tax
bracket for taxpayers filing as single.
·
Alternative Minimum Tax
Exemptions: The amount of income exempt from the
alternative minimum tax was increased. For
taxpayers filing a joint return or a surviving spouse, the exemption amount is
$72,450 for 2010 and $74,450 for 2011. For all other taxpayers, the exemption
is $47,450 for 2010 and $48,450 for 2011.
·
Child Related Tax
Credits. Tax provisions related
to children and families include:
o
Refundable Child Tax Credit was maintained through
2012;
o
Earned Income Tax Credit was extended through
2012;
o
Increase in Dependent Care
Credits
were maintained through 2012; and
o
$10,000 Adoption Credit was extended
through 2012.
·
Education related Tax Provisions. These include:
o
Increase in Coverdell
Education Savings Accounts was extended through 2012.
o
Increase in Exclusion
for Employer Provided Educational Assistance was extended through 2012.
o
Increased Income Limitations
for Deductibility of Student Loan Interest was extended through 2012.
o
American Opportunity Tax
Credit for
education expenses has been extended through 2012.
o
Scholarship Exclusions: Taxpayers who receive
either the National Health Service Corps Scholarship or the F. Edward Hebert
Armed Forces Health Professions Scholarship can exclude the scholarships from
their gross income through 2012.
o
Above-the-Line Deduction for Qualified Tuition and
Related Expenses was extended through 2011.
Additional tax
provisions included in the legislation related to individual taxpayers include:
·
Deduction for Certain Expenses of Elementary and
Secondary School Teachers was
extended for 2010 and 2011.
·
Deduction of State and Local Sales Taxes in lieu of the state and local income taxes was extended for 2010 and
2011.
·
Increase in Charitable Contributions
of Capital Gain Real Property Made for Conservation Purposes was
extended for 2010 and 2011.
·
Tax-Free Distributions from Individual Retirement
Plans for Charitable Purposes for
taxpayers over 70 1/2 was extended through 2011.
·
Look-thru of Certain Regulated Investment Company
Stock in Determining Gross Estate of Nonresidents was extended through 2011.
·
Increase in Exclusion from Income for Employer-Provided
Mass Transit and Parking Benefits was
extended through 2011.
·
Refunds
Disregarded in the Administration of Federal Programs and Federally Assisted
Programs: A new provision was added to the Internal Revenue Code which provides that refunds received in
2010 and 2011 would be disregarded for purposes of determining eligibility for
certain Federal programs and certain Federally assisted state or local
programs.
·
Deduction
Limitations for Mortgage Insurance Premiums were extended through 2011.
Tax Provisions Related
to Businesses
·
Temporary Exclusion of 100
Percent of Gain on Certain Small Business Stock: Generally, non-corporate taxpayers
may exclude 50 percent of the gain from the sale of certain small business
stock acquired at original issue and held for more than five years. This exclusion had been increased to 100
percent for qualified stock acquired after
Sept. 27, 2010 and before Jan. 1, 2011, and has now been
extended through Jan. 1, 2012. Read more
about this exclusion.
·
Bonus Depreciation: Businesses of any size can immediately expense
the cost of business assets by claiming 100 percent bonus depreciation for new
assets put in use after Sept. 8, 2010 and before Jan. 1, 2012, if the property
has a useful life of 20 years or less. This includes machinery, land improvements and
single-purpose farm buildings.
·
Small Business
Expensing: For tax years beginning
in 2010 or 2011, small businesses may elect to expense up to $500,000 of
capital investment (increased from $250,000).
The phase out for this expensing option begins with capital investments
that cost at least $2 million.
Many other tax credits and tax
provisions related to businesses were included in this legislation. The following is an overview of these
provisions:
·
New Markets Tax Credit was extended for
2010 and 2011.
·
IRC Section 41 Research Credit was extended through 2011.
·
Railroad Track Maintenance Credit
was extended through 2011.
·
Mine Rescue Team Training Credit
was extended through 2011.
·
Employer Wage Credit for Employees Who Are Active Duty
Members of the Uniformed Services was extended for 2010 and 2011.
·
15-Year
Straight-Line Cost Recovery for Qualified Leasehold Improvements, Qualified
Restaurant Buildings and Improvements and Qualified Retail Improvements was extended for qualified property placed in service before 2012.
·
7-Year
Recovery Period for Motorsports Entertainment Complexes was
extended for qualified property placed in service before 2012.
·
Accelerated
Depreciation for Business Property on an Indian Reservation was
extended for qualified property placed in service before 2012.
·
Enhanced
Charitable Deduction for Corporate Contributions of Computer Inventory for
Educational Purposes was extended to
contributions made before 2012.
·
Election
to Expense Mine Safety Equipment was
extended for property
placed in service before 2012.
·
Special Expensing Rules for Certain Film and
Television Productions was extended through 2011.
·
Election to Expense of Environmental Remedial Costs was extended through 2011.
·
Deduction Allowable with Respect to Income
Attributable to Domestic Production Activities of Puerto Rico was extended through 2011.
·
Modification
of Tax Treatment of Certain Payments to Controlling Exempt Organizations was extended through
2011.
·
RIC Qualified Investment Entity Treatment Under FIRPTA
was extended through 2011.
·
Exceptions for Active Financing Income was extended for tax years beginning before 2012.
·
Look-thru Treatment of Payments Between Related
Controlled Foreign Corporations Under Foreign Personal Holding Company Rules was extended through 2011.
·
Empowerment Zone Tax Incentives
was extended for 2010 and 2011.
·
Tax Incentives for Investment in the District of
Columbia was
extended for 2010 and 2011.
·
Funding for Qualified Zone Academy Bonds was provided through 2011.
·
Child Care Facility
Credit was
extended through 2012.
·
Arbitrage Rebate
Exception for
governmental bonds used to finance educational facilities was extended through
2012.
·
Rules Permitting Tax-exempt
Private Activity Bonds for public school facilities were extended through 2012.
Tax Provisions Related
to the Estate and Gift Tax
·
Estate and Gift Tax
Rate: The maximum tax rate for property not
excluded from the estate and gift tax is reduced to 35 percent.
·
Gift and Estate Tax
Exemption: The legislation reunifies the exemption
amount for the estate and gift tax (the exemptions for estate tax purposes and
gift tax purposes had previously been separated), and sets the maximum exemption
amount at $5,000,000 (this amount is adjusted for inflation after 2011).
·
Portability of Estate
Tax Exemption: A surviving spouse can use any portion of the
deceased spouse’s unused estate tax exemption in addition to his or her own $5
million exemption if an election is made in the deceased spouse’s estate.
·
2010 Estates: Since the estate tax had expired in 2010, the
legislation provides that executors of estates of decedents who died in 2010
are allowed to elect to apply the Internal Revenue Code Section 1022 modified
carryover basis regime, or alternatively, can apply the reinstated estate tax
regime. Due to the delay in enacting new
estate tax provisions, the legislation permits an extension of at least nine
months for those estates created after 2009 and prior the enactment of the
legislation to (1) file an estate tax return; (2) pay any estate taxes due; and
(3) make any required disclaimers of property passing by reason of the
decedent’s death.
Tax
Provisions Related to Energy Credits
·
New Energy Efficient Tax
Credit was
extended to the end of 2011. Certain
qualifying requirements for the tax credit were modified.
·
Incentives for Biodiesel
and Renewable Diesel were
extended through 2011.
·
Credit for Refined Coal Facilities was extended through 2011.
·
New Energy Efficient Home Credit was extended through 2011.
·
Excise Tax Credits and Outlay Payments for Alternative
Fuel and Alternative Fuel Mixtures were
extended through 2011.
·
Suspension of Limitation on Percentage Depletion for
Oil and Gas from Marginal Wells was
extended through 2011.
·
Grants for Specified Energy Property in Lieu of Tax
Credits were extended through 2011.
·
Alcohol fuels credit was
extended for sales through 2011.
·
Additional duties on
ethanol was extended through 2011.
·
Energy Efficient Appliance
Credit was extended past 2010.
·
Credit for Non-Business Energy Property was made applicable to property placed in service before 2012.
·
Alternative
Fuel Vehicle Refueling Property was
extended for non-hydrogen
related property placed in service on or before Dec. 31, 2011.
·
Special
Rule for Sales or Dispositions to Implement FERC or State Electric
Restructuring Policy for Qualified Electric Utilities was extended through 2011.
Bond and Other
Provisions Related to Disaster Relief
·
Tax-Exempt
Bond Financing for New York Liberty
Zone Bonds
was extended for 2010 and 2011.
·
Increase
in Rehabilitation Credit for the Gulf Opportunity Zone was
extended for 2010 and 2011.
·
Low-Income Housing Credit Rules for Buildings in GO
zones was extended through 2011.
·
Tax-Exempt
Bond Financing for GO Zone Bonds was
extended through 2011.
·
Bonus Depreciation Deduction Applicable to the GO Zone
was extended for 2010 and 2011.
·
Work
Opportunity Credit was extended through 2011.
·
Basis
Adjustment to Stock of S Corporations Making Charitable Contributions of
Property was extended through 2011.
·
Treatment
of Certain Dividends of Regulated Investment Companies was
extended through 2011.
·
Enhanced
Charitable Deduction for Contributions of Food Inventory was
extended to contributions made before 2012.
·
Enhanced
Charitable Deduction for Contributions of Book Inventories to Public Schools was
extended to contributions made before 2012.
·
Temporary
Increase in Limit on Cover over of Rum Excise Taxes to Puerto Rico and the
Virgin Islands was extended for 2010 and 2011.
·
American
Samoa Economic Development Credit was extended through 2011.
·
Indian
Employment Credit was extended through 2011.
·
Alaska
Native Settlement Trusts: Tax provisions related to the Alaska Native
Settlement Trusts were extended through 2012.
For any questions related to this recently passed
legislation, please contact the Ice
Miller Tax Group.
Dec. 17, 2010
This publication is intended for general information
purposes only and does not and is not intended to constitute legal advice. The
reader must consult with legal counsel to determine how laws discussed herein
apply to the reader's specific circumstances.