EGTRRA Tax Cuts Extended for Two Years
Under current law, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), other than those made permanent or extended by subsequent legislation, sunset and won't apply to tax or limitation years beginning after 2010. (Sec. 901 of EGTRRA)
The 2010 Tax Relief Act postpones the Sec. 901 EGTRRA sunset rule for two years. That is, under the 2010 Tax Relief Act, the income tax provisions of EGTRRA, other than those made permanent or extended by subsequent legislation, will sunset and will not apply to tax or limitation years beginning after 2012 (instead of 2010). Thus, all of the following favorable tax rules (among others) will remain in place through 2012.
Tax rates. The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%). Additionally, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% (instead of dropping to 167%) of the 15% tax bracket for individual filers.
According to the Joint Committee on Taxation Explanation of the 2010 Tax Relief Act, the tax rate schedules for 2011, as adjusted for inflation, will be as follows:
FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES, THE 2011 RATE BRACKETS WILL BE:
If taxable income is: -- The tax will be:
Not over $17,000 -- 10% of taxable income
Over $17,000 but not over $69,000 -- $1,700.00 plus 15% of the excess over $17,000
Over $69,000 but not over $139,350 -- $9,500.00 plus 25% of the excess over $69,000
Over $139,350 but not over $212,300 -- $27,087.50 plus 28% of the excess over $139,350
Over $212,300 but not over $379,150 -- $47,513.50 plus 33% of the excess over $212,300
Over $379,150 -- $102,574.00 plus 35% of the excess over $379,150
FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES), THE 2011 RATE BRACKETS WILL BE:
If taxable income is: -- The tax will be:
Not over $8,500 -- 10% of taxable income
Over $8,500 but not over $34,500 -- $850.00 plus 15% of the excess over $8,500
Over $34,500 but not over $83,600 -- $4,750.00 plus 25% of the excess over $34,500
Over $83,600 but not over $174,400 -- $17,025.00 plus 28% of the excess over $83,600
Over $174,400 but not over $379,150 -- $42,449.00 plus 33% of the excess over $174,400
Over $379,150 -- $110,016.50 plus 35% of the excess over $379,150
FOR HEADS OF HOUSEHOLDS, THE 2011 RATE BRACKETS WILL BE:
If taxable income is: -- The tax will be:
Not over $12,150 -- 10% of taxable income
Over $12,150 but not over $46,250 -- $1,215.00 plus 15% of the excess over $12,150
Over $46,250 but not over $119,400 -- $6,330.00 plus 25% of the excess over $46,250
Over $119,400 but not over $193,350 -- $24,617.50 plus 28% of the excess over $119,400
Over $193,350 but not over $379,150 -- $45,323.50 plus 33% of the excess over $193,350
Over $379,150 -- $106,637.50 plus 35% of the excess over $379,150
FOR MARRIEDS FILING SEPARATE RETURNS, THE 2011 RATE BRACKETS WILL BE:
If taxable income is: -- The tax will be:
Not over $8,500 -- 10% of taxable income
Over $8,500 but not over $34,500 -- $850.50 plus 15% of the excess over $8,500
Over $34,500 but not over $69,675 -- $4,750.00 plus 25% of the excess over $34,500
Over $69,675 but not over $106,150 -- $13,543.75 plus 28% of the excess over $69,675
Over $106,150 but not over $189,575 -- $23,756.75 plus 33% of the excess over $106,150
Over $189,575 -- $51,287.00 plus 35% of the excess over $189,575
Standard deduction for marrieds. EGTRRA increased the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return.
If the EGTRRA sunset kicked in, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) would drop to 167% of the standard deduction for single taxpayers, and the standard deduction for married taxpayers filing separately would continue to be one-half of the standard deduction for joint filers.
Under the Senate passed 2010 Tax Reform Act, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% (rather than 167%) of the standard deduction for single taxpayers for 2011. (The standard deduction for marrieds filing separately is half of the joint filer amount.)
The standard deduction will be $11,600 (up from $11,400 for 2010); for marrieds filing separately, it will be $5,800 (up from $5,700 for 2010).
Pease and PEP limitations won't apply. For 2011 and 2012:
- Itemized deductions of higher-income taxpayers will not be reduced (under the EGTRRA sunset rule for the "Pease limitation," after 2010 they would have been reduced by 3% of AGI above an inflation-adjusted figure, but the reduction couldn't exceed 80%).
- A higher-income taxpayer's personal exemptions will not be phased out when AGI exceeds an inflation-adjusted threshold (under the EGTRRA sunset rule for the "Pease limitation," after 2010 they would have been phased out).
- 2011 the personal exemption amount will be $3,700 (up from $3,650 for 2010).
- Coverdell Education Saving Accounts (CESAs), formerly called education IRAs;
- exclusion for employer-provided educational assistance under Code Sec. 127 ;
- exemption from the payments-for-services rule for amounts received under certain Government health professions scholarship programs;
- above-the-line student loan interest deduction; credit for employer-provided child care facilities;
- adoption credit and adoption assistance programs exclusion, arbitrage rebate for school construction bonds, tax-exempt private activity bonds for qualified education facilities, American opportunity tax credit, extended earned income tax credit (EITC);
- tax relief for Alaska native settlement funds; credit for household and dependent care; and
- child tax credit.
The Senate passed 2010 Tax Reform Act defers for two years the sunset rule of Sec. 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, PL 108-27). Thus, through Dec. 31, 2012, long-term capital gain (with the exception of 28% rate gain and unrecaptured section 1250 gain) will continue to be taxed at a maximum rate of 15%. If the JGTRRA sunset rule went into effect, long-term capital gain would face a tax of 20% (18% for assets held more than five years)). And before 2013, qualified dividends paid to individuals will be taxed at the same rates as long-term capital gains (instead of being taxed under the JGTRRA sunset rule at the same rates that apply to ordinary income).
Alternative Minimum Tax (AMT) "Patched" for Two Years
Under the Senate passed 2010 Tax Reform Act, the AMT exemption amounts for 2010 will be as follows:
- Married individuals filing jointly and surviving spouses: $72,450, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $439,800);
- Unmarried individuals: $47,450, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $302,300) (different amount applies for a child subject to the kiddie tax); and
- Married individuals filing separately: $36,225, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $219,900). But AMTI is increased by the lesser of $36,225 or 25% of the excess of AMTI (without the exemption reduction) over $219,900.
- Married individuals filing jointly and surviving spouses: $74,450, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $447,800);
- Unmarried individuals: $48,450, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $306,300) (different amount applies for a child subject to the kiddie tax); and
- Married individuals filing separately: $37,225, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $223,900). But AMTI is increased by the lesser of $37,225 or 25% of the excess of AMTI (without the exemption reduction) over $223,900.
Also for 2010 and 2011, many nonrefundable personal credits will be allowed against the AMT (without the "patch," they couldn't offset AMT).
Estate Tax Relief
EGTRRA phased out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, lowered the gift tax rate to 35% and increased the gift tax exemption to $1 million for 2010. Under the EGTRRA sunset rule, the estate tax was set to return in 2011, with the top estate and gift tax rate reverting to 55%. For 2010, under EGTRRRA, the basis rules for inherited property were to be similar to the gift tax rules but with many opportunities for heirs to get increases in basis. Under the EGTRRA sunset rule, the pre-EGTRRA step-up in basis rules were to return for 2011.
The Senate passed 2010 Tax Relief Act:
- Lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount (technically, the applicable exclusion amount) from $1 million to $5 million (as indexed and rounded to the nearest multiple of $10,000 after 2011) and reducing the top rate from 55% to 35%.
- Allows estates of decedents dying in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis or (2) no estate tax and modified carryover basis. In technical terms, the Act achieves this choice by making the estate tax and basis changes effective retroactively for estates of decedents dying after 2009 but allowing the opt-out choice for estates of decedents dying in 2010.
- For gifts made after Dec. 31, 2010, reunifies the gift tax with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%.
- Provides that the GST tax exemption for decedents dying or gifts made after Dec. 31, 2009, is equal to the applicable exclusion amount for estate tax purposes (e.g., $5 million for 2010). Therefore, up to $5 million in GST tax exemption may be allocated to a trust created or funded during 2010. Although the GST tax is applicable in 2010, the GST tax rate for transfers made during 2010 is 0%. The GST tax rate for transfers made in 2011 and 2012 will be 35%.
- For a decedent dying after Dec. 31, 2009, and before the enactment date, provides that the due date for filing an estate tax return, making any payment of estate tax, and disclaiming an interest in property passing by reason of death is not to be earlier than the date that's nine months after the enactment date.
- Effective for estates of decedents dying after Dec. 31, 2010, allows the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse.
The Senate passed 2010 Tax Relief Act OKs the following major new incentives for businesses to invest in machinery and equipment:
- A 100% writeoff in the placed-in-service year of the cost of property eligible for bonus depreciation under Code Sec. 168(k) . This will apply for property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012;
- A 50% bonus first-year depreciation allowance under Code Sec. 168(k) for property placed in service after Dec. 31, 2011, and before Jan. 1, 2013;
- Extension through Dec. 31, 2012, of the election to accelerate the AMT credit instead of claiming additional first-year depreciation; and
- For tax years beginning after Dec. 31, 2011, setting the maximum expensing amount under Code Sec. 179 at $125,000 and the investment-based phaseout amount at $500,000 (under current law, the expensing figures drop from $500,000/$2 million for 2010 and 2011 to$25,000/$200,000 after 2011). Also, off-the-shelf computer software will qualify for the Code Sec. 179 expensing election if placed in service in a tax year beginning before 2013.
Under current law, employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay 12.4% Social Security self-employment taxes on all their self-employment income up to the same threshold. For 2011, the Senate passed 2010 Tax Reform Act gives a two-percentage-point payroll/self-employment tax holiday for employees and self-employeds. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.
The maximum savings for 2011 will be $2,136 (2% of $106,800).
Host of Expired Business Tax Breaks Retroactively Reinstated and Extended Through 2011
The following business tax breaks that expired at the end of 2009 will be retroactively reinstated and extended through 2011:
- research credit;
- Indian employment tax credit;
- new markets tax credit;
- railroad track maintenance credit;
- mine rescue team training credit;
- employer wage credit for activated reservists;
- 15-year writeoff for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements;
- 7-year writeoff for motorsports entertainment facilities;
- accelerated depreciation for business property on an Indian reservation; enhanced charitable deductions for contributions of food inventory, for contributions of book inventories to public schools and for corporate contributions of computer equipment for educational purposes;
- election to expense mine safety equipment;
- special expensing rules for certain film and television products;
- expensing of environmental remediation costs;
- allowance of the Code Sec. 199 domestic production activities deduction for activities in Puerto Rico;
- modification of tax treatment of certain payments to controlling exempt organizations;
- treatment of certain dividends of regulated investment companies (RICs);
- RIC qualified investment entity treatment under FIRPTA;
- exceptions for active financing income;
- look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules;
- basis adjustment to stock of S corporations making charitable contributions of property;
- empowerment zone tax incentives;
- tax incentives for investment in the District of Columbia;
- temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands; and
- American Samoa economic development credit.
Other Business Tax Breaks Extended Through 2011
The following business tax breaks are extended through 2011:
- the work opportunity tax credit; and
- qualified zone academy bonds.
Long List of Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011
All of the following tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011:
- the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers;
- the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes;
- increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes;
- the above-the-line deduction for qualified tuition and related expenses;
- the provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010);
- look-thru of certain RIC stock in determining gross estate of nonresidents; and
- disregard of refunds in the administration of federal or federally assisted benefit programs.
The following tax breaks for individuals that were set to expire at the end of 2010 will be extended through 2011:
- the increase in the monthly exclusion for employer-provided transit and vanpool benefits equal to that of the exclusion for employer-provided parking benefits (i.e., $230 per month);
- treatment of mortgage insurance premiums as deductible qualified residence interest; and
- exclusion of 100% of gain on certain small business stock.
The list of energy-related provisions that will be extended through 2011 are:
- the $1.00 per gallon production tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon;
- the $1.00 per gallon production tax credit for diesel fuel created from biomass;
- the placed-in-service deadline for qualifying refined coal facilities;
- the credit for manufacturers of energy-efficient residential homes;
- the $0.50 per gallon alternative fuel tax credit (but the credit will not be extended for any liquid fuel derived from a pulp or paper manufacturing process);
- deferral of gain on qualified electric utilities' sales or dispositions of electric transmission property;
- the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well;
- grants for specified energy property in lieu of tax credits;
- the income tax credit for alcohol used as fuel;
- the reduced credit for ethanol blenders;
- the excise tax credit for alcohol used as fuel;
- the payment for alcohol fuel mixture;
- additional duties on imported ethanol;
- the energy efficient appliance credits (in new amounts and with new requirements);
- the Code Sec. 25C credit for energy-efficient improvements to existing homes, but reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act (standards for property eligible under Code Sec. 25C are updated to reflect improvements in
- energy efficiency));
- the 30% investment tax credit for alternative vehicle refueling property.
The following disaster relief provisions will also be extended through 2011:
- the time for issuing New York Liberty Zone bonds, effective for bonds issued after Dec. 31, 2009;
- the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone (GO Zone);
- the placed-in-service deadline to claim additional low-income housing credits for buildings in GO Zones;
- tax-exempt bond financing; and
- the additional depreciation deduction claimed by businesses equal to 50% of the cost of new property investments made in the GO Zone (expenditures in 2011 will be eligible if the property is placed in service by Dec. 31, 2011).
The House of Representatives on Thursday by a vote of 277–148 passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, HR 4853, which would postpone the sunset of the 2001 and 2003 tax cuts, reduce the estate tax, extend a large number of expired provisions, and extend unemployment benefits. The bill now goes to President Barack Obama for his signature, which is expected soon.
The House passed the Senate’s version of the bill without amendment. Prior to the vote on the bill, the House rejected, by a vote of 194–233, a motion that would have stricken the estate tax provisions in the bill and replaced them with an estate tax provision providing for a 45% rate and a $3.5 million exemption.
The bill has provisions covering the estate tax, expiring tax cuts, expired tax provisions and an alternative minimum tax (AMT) patch.
The bill postpones the scheduled sunset of the lower tax rates introduced in 2001 by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, PL 107-16); those rates will now continue through 2012. The bill also continues the lower capital gains tax rate introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (PL 108-27) through 2012.
The EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout are extended by the bill for two years.
For 2011 only, the bill 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 at 6.2%).
The bill 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 individuals filing jointly. For 2011, the amounts will be $48,450 and $74,450, respectively.
The bill extends the 100% bonus depreciation for business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property). The bill also sets the expensing limitation under IRC § 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. The bill then reduces these amounts to $25,000 and $200,000 for tax years beginning after 2012.
The bill temporarily reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011).
The bill also extends a large number of expired or expiring provisions, including:
- The increased standard deduction for married taxpayers filing jointly, scheduled to expire after 2010, would continue for two years;
- The $1,000 child tax credit amount would continue for two years, instead of reverting to $500;
- The increased starting and ending points for the earned income credit would continue for two years;
- The $3,000 amount for the child and dependent care credit, which is scheduled to revert to $2,400 after 2010, would continue for two years;
- The American opportunity tax credit would continue for two years;
- 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, would be extended through 2011.
