Year-End Tax Planning Alert—The 2010 Tax Act The newly passed and signed 2010 Tax Act could significantly affect your tax planning. Here is the information you need to know.
Postpones the sunset of the 2001 and 2003 tax cuts;
Reduces the estate tax;
Extends unemployment benefits;
Includes an alternative minimum tax (AMT) patch;
Continues through 2012 the lower capital gains tax rate introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003; and
Extends for two years the repeal of the itemized deduction phase-out and the personal exemption phase-out.
2010 Gift Exclusion
The gift exclusion remains at only $1 million for 2010. If you are married, you and your spouse can together gift $2 million.
After 2010, the gift & estate tax exclusions are unified at $5 million.
Caution: These figures assume that you have never made taxable gifts before (gifts in excess of $13,000 per donee/year).
Caution: The $5 million gift exclusion does not begin until 2011. This might be confusing to many taxpayers because the $5 million exclusion for estate and Generation Skipping Transfer (GST) is effective January 1, 2010.
Gifts to Grandchildren
In 2011 & 2012 transfers to grandchildren—and other “skip persons” in GST parlance—will be limited to the $5 million GST exemption.
Unless Congress acts in 2013 the GST exemption drops to $1 million (inflation indexed) and the rate increases to 55%.
Estate Tax The Act reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011). For 2010, estates have a choice between being subject to the estate tax or having heirs inherit taking the decedent’s basis in the property.
Payroll Tax For 2011, the Act reduces the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2%. The employer’s portion remains 6.2%.
Family The Act extends several expired or expiring provisions affecting families, including:
the increased standard deduction for married taxpayers filing jointly, scheduled to expire after 2010, continues for two years;
the $1,000 child tax credit amount continues for two years instead of reverting to $500;
the increased starting and ending points for the earned income credit continues for two years;
the $3,000 amount for the child & dependent care credit, which was scheduled to revert to $2,400 continues for 2 years; and
the American Opportunity Tax Credit continues for two years.
Business The Act introduces 100% bonus depreciation for business property acquired after September 8, 2010, before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property). It also sets the expensing limitation under IRC §179 at $125,000 and the phase-out threshold amount at $500,000 for 2012. Those amounts will then be reduced to $25,000 and $200,000 for tax years beginning after 2012.
The temporary 100% exclusion of gain from the sale of certain small business stock under IRC §1202, enacted by the Small Business Jobs Act of 2010, is extended through 2011.
AMT The Act includes an AMT patch for 2010 and 2011.
For 2010, the AMT exemption amounts will be $47,450 for unmarried individuals and $72,450 for married filing jointly.
For 2011, the amounts will be $48,450 and $74,450, respectively.
The law is potentially subject to modifications by technical correction acts. In addition, provisions of the law may be interpreted by the Treasury Department issuing regulations and by the IRS issuing forms and instructions.