December 20, 2010
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act). The Act extends the existing individual income tax rates and a number of expiring credits and other benefits, provides a few new temporary tax incentives, and establishes new gift and estate tax rates and exemptions.
Extension of Expiring Tax Provisions
The Act extends the current income rates (which reach a maximum marginal rate of 35%) through the end of 2012 for all taxpayers. The effective dates of the personal exemption phaseout and the overall limitation on itemized deductions are both delayed from 2010 until after 2012. Likewise, the Act retains the current 0% and 15% rates for qualified dividend income (including dividends from qualified foreign corporations) and long term capital gains through the end of 2012. The Act also includes an alternative minimum tax "patch" for 2010 and for 2011 (each reflecting an upward adjustment for inflation), but it does not provide AMT relief for subsequent years.
Included in the package are also extensions of a variety of expiring tax provisions through 2011. Among the extended provisions are research, energy, and alternative fuel credits; the election to claim itemized deductions for sales taxes; education-related tax incentives; certain incentives for business charitable contributions; and charitable donations of qualified conservation easements. The new markets tax credit and certain other development tax incentives and public bond incentives are likewise extended through 2011. In the international realm, the Act also extends the subpart F exception for active financing income and look-through treatment for payments between related controlled foreign corporations through tax years beginning before 2012.
Temporary Payroll Tax Reduction
The social security tax rate for employees and for self-employment income are both reduced by 2 percentage points (to 4.2% and 10.4%, respectively) under the Act for 2011. The determination of the wage base (or self-employment income) on which the tax is applied is unchanged. This benefit was intended to replace the expiring "making work pay credit," but unlike the credit, this benefit does not phase out for high-income taxpayers.
Accelerated Business Equipment Depreciation
The Act provides that a taxpayer is entitled to currently deduct 100% of the cost of qualifying property that is acquired and placed in service after September 8, 2010, and before 2012. For qualifying property acquired and placed in service after 2011 and before 2013, the Act also extends the existing 50% accelerated deduction provision. In each case, qualifying aircraft or long-production-period property have an additional year to be placed in service to qualify for these accelerated deduction incentives. Qualifying property generally includes most machinery, equipment, tangible personal property, and computer software, plus certain leasehold improvements, provided they are not depreciated under the alternative depreciation system.
In addition, the Act extends a number of expiring cost recovery incentives—such as those applying to qualified advanced mine safety equipment, qualified film and television productions, qualified environmental remediation, and motorsports entertainment complexes—through 2011 as well.
Gift and Estate Tax
The Act establishes a top rate of 35% for the estate tax and generation-skipping tax for decedents dying, and transfers made, in 2011 and 2012. Likewise, the top gift tax rate during those years is also set at 35%. The gift tax exclusion remains at $1 million for gifts made in 2010. For 2011, the gift tax and estate tax exclusions are unified again at $5 million, and that amount is subject to an inflation adjustment for 2012. Moreover, in 2011 and 2012, the unused gift and estate tax exclusion is "portable" in that the spouse of a decedent may use the unused portion of the decedent’s exclusion.
For estates of decedents dying in 2010, the Act allows the estate to elect to generally apply the 2010 provisions in effect prior to the Act or the new provisions applicable in 2011.
After 2012, the top gift tax and estate rate will increase to 55%, unless a further legislative change is adopted.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these developments. If you have any questions, please contact the Gibson Dunn lawyer with whom you work or one of the Gibson Dunn lawyers listed below:
New York
Charles F. Feldman (212-351-3908, [email protected])
David B. Rosenauer (212-351-3853, [email protected])
Jeffrey M. Trinklein (212-351-2344, [email protected])
Romina Weiss (212-351-3929, [email protected])
Washington D.C.
Art Pasternak (202-955-8582, [email protected])
Michael J. Collins (202-887-3551, [email protected])
Benjamin Rippeon (202-955-8265, [email protected])
Los Angeles
Hatef Behnia (213-229-7534, [email protected])
Paul S. Issler (213-229-7763, [email protected])
Dora Arash (213-229-7134, [email protected])
Sean Feller (213-229-7579, [email protected])
J. Nicholson Thomas (213-229-7628, [email protected])
Orange County
Gerard J. Kenny (949-451-3856, [email protected])
Scott Knutson (949-451-3961, [email protected])
Palo Alto
Stephen W. Fackler (650-849-5385, [email protected])
Dallas
David Schiller (214-698-3205, [email protected])
David Sinak (214-698-3107, [email protected])
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.
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