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Provisions in Year-End Tax Legislation
- by Roger McEowen
December 11, 2010
Updated December 17, 2010
Over the past couple of weeks, the White House gave up on its push for a tax increase on higher income earners and began pushing a deal with key tax legislators in the House and Senate to addresses a number of tax provisions in addition to keeping 2011 individual income tax rates at the 2010 level, at least for a short period of time. While the bill does contain a tax increase on decedent’s estates(and generation skipping transfers) compared to the 2010 law, the estate tax provisions are more favorable than many expected. The bill passed the Senate on December 15 by a vote of 81-19, and just before midnight on December 16 the House passed the bill by a 277-148 margin. The bill, H.R. 4853, is termed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.”
The following is a summary of the major provisions of most relevance:
Income Tax Provisions
Rates. The EGTRRA rate structure put in place in 2001 would continue through 2012 instead of expiring at the end of 2010. So, the top individual income tax rate would remain at 35 percent and the rate for capital gains and dividends would stay at 15 percent through 2012. In addition, the 10 percent bracket will remain in place for two more years instead of increasing to 15 percent. That prevents a 50 percent tax increase on low-bracket taxpayers starting next year. Likewise, the repeal of the phase-out on personal exemptions in effect for 2010 is extended through 2012 as is the repeal of the limit on itemized deductions which was in effect for 2010 – it has been extended through 2012.
Other income tax provisions.
- The bill extends the child tax credit through 2012.
- The bill extends existing marriage penalty relief for the standard deduction, the 15 percent marginal income tax bracket and the earned-income tax credit through 2012.
- The bill extends the dependent care credit through 2012.
- The changes made to the adoption tax credit by the 2010 health care bill would be extended through 2012.
- The bill would extend the credit for employer expenses for child care assistance through 2012.
- The enhanced provisions applicable to the earned-income tax credit added by the 2009 bailout bill would be extended through 2012.
Bonus depreciation. The bill specifies that for qualified assets (original use of the asset by the taxpayer) placed in service after September 8, 2010 through December 31, 2011, 100 percent bonus depreciation is available. For 2012, bonus depreciation would be limited to 50 percent of the qualified property’s adjusted basis. Also, the bill specifies that a taxpayer could elect to accelerate some AMT credits in lieu of bonus depreciation for tax years 2011 and 2012.
Practitioner Note: 100% bonus is not available for assets placed in service before September 8, 2010.
I.R.C. §168(k)(5) specifies as follows: “In the case of qualified property acquired by the taxpayer (under
rules similar to the rules of clauses (ii) and (iii) of paragraph (2)(A)) after September 8, 2010, and before
January 1, 2012, and which is placed in service by the taxpayer before January 1, 2012 (January 1, 2013, in
the case of property described in subparagraph (2)(B) or (2)(C) ), paragraph (1)(A) shall be applied by
substituting “100 percent” for “50 percent”.” Thus, it appears that there is no ability for “elective” treatment
for prior acquisitions. The provision is also is based on “acquired,” not “placed in service.” So, a taxpayer
that buys an asset before September 8, 2010, but puts it in service afterwards, the 50 percent rule applies.
Likewise, the only elective option for post September 8, 2010, acquisitions is regular MACRS.
Expense method depreciation. In 2012, expense method depreciation (for federal tax purposes) would be set at $125,000, with the phase-out beginning at $500,000 of qualified property purchases for the year. The provision is adjusted for inflation. Without subsequent legislation, the limit will fall to $25,000 beginning in 2013. The bill also extends the ability to revoke an expense method election on an amended return through 2012.
Practitioner Note: The IRS has stated in Info. 2009-0059 (Feb. 17, 2009) that taxpayers can
make or revoke an expense method depreciation (Sec. 179) election on an amended return
(involving an open tax year) for a taxable year beginning after 2007 and before the date specified
in I.R.C. §179(c)(2) without the need for Treasury Regulations to be issued. IRS noted that taxpayers
can rely on the guidance set forth in Rev. Proc. 2008-54, Section 7 for making and revoking such
elections. The Congress, with this Act, has amended I.R.C. §179(c)(2) to specify that the date is now December 31, 2012.
Automobile depreciation. The limit on the deduction for new cars (so-called “luxury autos”) will be $11,060, with the
balance subject to the rules contained in I.R.C. §280F in later years.
Extension of Expiring Provisions
Energy-related provisions. The bill renews (on a temporary basis) many expiring provisions. The energy-related provisions that are extended are as follows:
- Biodiesel and “renewable” diesel – extended through 2011 is the $1.00/gallon production tax credit for biodiesel and the $.10/gallon producer credit for small agri-biodiesel producers. In addition, the $1.00/gallon production tax credit for biomass-created diesel fuel is extended through 2011.
- The placed-in-service deadline for certain refined coal facilities is extended through 2011.
- The suspension on the taxable income limit for marginal oil or gas well depletion is extended through 2011.
- The ethanol subsidy is extended through 2011. That means the tax credit is extended as is the $.54/gallon tariff on imported ethanol and the $.2267 tariff on ETBE.
- The alternative fuel tax credit is also extended through 2011 at $.50 per gallon. But, “Black Liquor” is not eligible for the credit.
- Through 2011, the bill extends the 30 percent investment tax credit for “alternative vehicle refueling property.”
- Extended through the end of 2011 is the required beginning date for construction so that the taxpayer can receive a cash grant in lieu of a tax credit under Section 1603 of the 2009 bailout bill.
- The bill would extend through 2011 the credit for manufactures of energy-efficient residential homes.
- The bill would extend through 2011, the I.R.C. §45M credit for the manufacture of energy-efficient clothes washers, dishwashers and refrigerators manufactured by U.S.-based companies (and increases the energy efficiency standards)
- The bill would extend through 2011, the I.R.C. §25C credit for energy-efficient improvements to existing homes.
- Expenses incurred by elementary and secondary school teachers will be able to be claimed as an above-the-line deduction for 2010 and 2011. It’s a $250 deduction for expenses paid or incurred for books, supplies, computer equipment and supplemental materials that the teacher uses in the classroom.
- Restored retroactively for 2010 and extended through 2011 is the ability to make an election to treat as an itemized deduction amounts paid for state and local sales taxes in lieu of an itemized deduction for state and local income taxes.
- Restored retroactively for 2010 and extended through 2011 are the enhanced contributions limits and carry-forward periods for contributions of appreciated real property (including partial interests (i.e., easements)) for conservation purposes.
- Restored retroactively for 2010 and extended through 2011 is the ability to make tax-free withdrawals from an IRA for purposes of distributing the funds to a charity in amounts up to $100,000 per taxpayer, per year. Transfer made in January of 2011 can be treated as having been made in 2010.
- Importantly, the bill does not extend the First Time Homebuyer Tax Credit or the Long-Term Homeowner Tax Credit. For returns filed in 2011 on which the credit is claimed for a 2010 purchase, it is important to file Form 5405 and include appropriate documentation to help IRS in processing the credit on a timely basis. For qualifying 2010 purchases, the taxpayer can claim it on Form 1040 for tax-year 2009 if a 2009 return has not yet been filed. If a 2009 return has already been filed, the credit can be claimed on an amended return via Form 1040X. Alternativley, the credit can be claimed on the 2010 Form 1040.
- The research and development credit is retroactively restored for 2010 and extended through 2011.
- Restored retroactively for 2010 and extended through 2011 is 15-year MACRS treatment for qualified leasehold improvements, qualified restaurant property, and qualified retail improvements.
- Restored retroactively for 2010 and extended through 2011 is the provision specifying seven-year MACRS treatment of property used for land improvements and associated facilities at “motorsports entertainment complexes.”
- The bill retroactively restores for 2010 and extends for 2011 the provisions that provide for enhanced charitable deductions for contributions of book inventories to public schools, corporate contributions of computer equipment for educational purposes and contributions of food inventory.
- The bill retroactively restores for 2010 and extends for 2011 the provision allowing expensing of costs associated with the clean-up of hazardous waste sites.
- Retroactively restored for 2010 and extended for 2011 is the ability of S corporation shareholders to take into account their pro-rata share of charitable deductions (even if it exceeds the shareholder’s adjusted basis in the S corporation).
- Extended through 2011 is the American Samoan economic development credit.
- The bill extends for four months (for September 2011 through the end of the year) the Work Opportunity Tax Credit
- The bill extends through 2011 the provision that allows premiums for mortgage insurance to be deducted as interest that is “qualified residence interest” (for taxpayers with AGI of $110,000 or less).
- Extended through 2011 is the provision contained in the bank bailout bill of September 27, 2010 (Small Business Jobs Act of 2010) which allows non-corporate taxpayers to exclude gain on small business stock acquired after September 27, 2010 and held for more than five years.
Education-Related Tax Provisions
- Restored retroactively for 2010 and extended through 2011 is the provision allowing an above-the-line deduction for qualified education expenses.
- The changes made by EGTRRA to Coverdell Education Savings Accounts (annual contribution of $2,000 and expanded definition of eligible education expenses) would be extended through 2012.
- The bill would extend through 2012 the EGTRRA-enhanced provisions applicable to employer-provided education assistance (exclusion from gross income of up to $5,250 annually for employment and income tax purposes ).
- The bill would extend the existing $2,500 student loan interest deduction through 2012.
- The bill would extend through 2012 the provision that excludes from income amounts received under specified scholarship programs for tuition and related expenses.
- The bill would extend the American Opportunity Tax Credit (formerly the HOPE Credit) through 2012.
Alternative Minimum Tax
The bill contains a two-year “AMT patch.” The AMT exemption is set at $47,450 for individuals for 2010, $72,450 for those filing as married filing jointly. In 2011, the exemption will be $48,450 for individuals, $74,450 if filing status is married filing jointly.
As we have previously noted, the EGTRRA sunset provisions create uncertainty concerning the income tax basis rule to be utilized for property that is inherited from a 2010 decedent’s estate that is sold in a tax year beginning after 2010. The bill recognizes that lack of clarity by completely repealing carryover basis (for two years) with an exception for 2010 –an election can be made to have no estate tax apply for deaths in 2010 or have estate tax apply at a 35 percent rate after a $5 million exemption per decedent. Whether that election removes the uncertainty created by the EGTRRA sunset provision remains to be seen. The gift tax rate would also be 35 percent after a $5 million exemption (up from $1 million) for 2011 and 2012, but is only $1 million for gifts in 2010. As for the GSTT, the bill would establish a $5 million exemption and a 35 percent rate for 2010. For deaths and taxable transfers in 2011 and 2012, the exemption for estate, gift and GSTT purposes would be $5 million and the tax rate would be 35 percent beyond that level. The bill would also allow portability of the estate tax exemption between spouses for deaths in 2011 and 2012. So, the new applicable exclusion amount is the basic exclusion amount plus the portable amount carried over from the decedent’s last spouse. Because the exemption for 2011 and 2012 would be $5 million for estates and gifts, the transfer tax rate structure would be re-unified. So, its only temporary certainty – in 2013, the exclusion will be $1 million and the tax rate will be 55 percent unless the Congress takes action.
FICA tax. While the employer portion of the FICA tax would remain at 6.2 percent, the deal is that the employee portion would decline to 4.2 percent on earned wages up to $106,800 - for 2011 only. Self-employed persons would pay 10.4 percent (down from 12.4 percent) on self-employment income up to $106,800 for 2011.
Unemployment Benefits. Reports are that the deal includes an extension of jobless benefits for 13 months (which sets the issue up for a replay just in time for next Christmas). The extension is for those whose benefits have not already run out.
The bill represents quite a compromise by the White House. The Administration had hung-on to its economic policy with a tight grip until the November elections. The historic election losses sustained by the Administration were followed up by the U.S. Department of Labor Statistics that became public in early December showing unemployment had risen to 9.8 percent. While the President still maintained up to the end that the deal wasn’t necessary to ward off a double-dip recession, that position was countered by one of the President’s economic advisors (Larry Summers) who said that continuing the tax policy set in place in 2001 was necessary to prevent a “double-dip” recession. The legislation is only a two-year continuation, however. While the House may take up legislation to make many or all of the provisions permanent, it is not anticipated that such a bill would make it through the Senate in the next session of the Congress. The urgency of doing something is now gone. That sets things up for tax policy to play a key role in the 2012 political season.