TAX RELIEF ACT OF 2010
presented by
R. Nicholas Nanovic, Esq.
May 12, 2011
www.thsLaw.com
1611 Pond Road Suite 300 Allentown, PA 18104 ● 610-391-1800 ● 610-391-1779 (fax)
1
Tax Relief Act of 2010
• Official name: Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act
of 2010
• Public Law 111-312
• Signed into law on December 17, 2010
• Affects personal income taxes, business income
taxes, and estate/gift taxes
2
Personal Income Tax: Rates
• Ordinary Income Tax Rates
– 2010 rates extended to 2011 and 2012
2010
2011-2012
2013+
10%
10%
15%
15%
15%
15%
25%
25%
28%
28%
28%
31%
33%
33%
36%
35%
35%
39.6%
3
Personal Income Tax: Rates
• Ordinary Income Tax Rates
– 2010 tax brackets
Single
MFJ
10%
$0 - 8,375
$0 - 16,750
15%
$8,376 - 34,000
$16,751 -68,000
25%
$34,001 - 82,400
$68,001- 137,300
28%
$82,401 - 171,850
$137,301 - 209,250
33%
$171,851 - 373,650
$209,251 -373,650
35%
$373,651+
$373,651+
4
Personal Income Tax: Rates
• Capital Gains Rates
– 2010 long term capital gain rates extended to 2011
and 2012
Income Tax Bracket
2010
2011-2012
2013+
10% (15%)
0%
0%
10%
15% (15%)
0%
0%
10%
25% (28%)
15%
15%
20%
28% (31%)
15%
15%
20%
33% (36%)
15%
15%
20%
35% (39.6%)
15%
15%
20%
5
Personal Income Tax: Rates
• Qualified Dividend Rates
– 2010 rates extended to 2011 and 2012
– Taxed as ordinary income after 2012
Income tax bracket
2010
2011-2012
2013+
10% (15%)
0%
0%
15%
15% (15%)
0%
0%
15%
25% (28%)
15%
15%
28%
28% (31%)
15%
15%
31%
33% (36%)
15%
15%
36%
35% (39.6%)
15%
15%
39.6%
6
Personal Income Tax: Rates
• Alternative Minimum Tax (AMT)
– Alternative minimum tax exemption amounts
increased for 2010 and 2011, subject to phaseouts
– Phaseouts of $112,500 (Single or HoH), $150,000
(MFJ), and $75,000 (MFS)
– Tax rate remains 26% for first $175,000 of postexemption amount and 28% for excess
Status
2010 Exemption
2011 Exemption
2012 Exemption
Single or HoH
$47,450
$48,450
$33,750
MFJ
$72,450
$74,450
$45,000
MFS
$36,225
$37,225
$22,500
7
Personal Income Tax: Rates
• Payroll Tax Holiday (Maximum benefit of
$2,136)
– Before 2011, 6.2% of employee’s first $106,800 of
wages were withheld for social security tax (employer
pays matching 6.2%)
– In 2011, 4.2% of employee’s first $106,800 of wages
are withheld for social security tax (employer still
pays 6.2%)
– In 2011, self-employment tax decreased from 12.4% to
10.4% for first $106,800 of self-employment income
8
Personal Income Tax:
Deductions
• Student Loan Interest
– Extension of increased phaseout thresholds to 2011
and 2012
• Phaseout if income exceeds $60,000 for individuals and
$120,000 for joint filers; Completely phased out if income is
$75,000 or $150,000, respectively
• Without extension, phaseout if income exceeds $40,000 for
individuals and $60,000 for joint filers; Completely phased
out if income is $55,000 or $75,000, respectively
– Extension of repeal of 60-month limitation on
deduction
• Without extension, taxpayer could not deduct any student
loan interest after 60 months
– Maximum deduction still limited to $2,500
9
Personal Income Tax:
Deductions
• Qualified Tuition and Expenses
– Deduction for qualified tuition and expenses
extended to 2010 and 2011
– Deduction limited to maximum of $4,000 and subject
to phaseout thresholds
– Taxpayer must choose either deduction or credit for
education expenses
10
Personal Income Tax:
Deductions
• Personal Exemption
– Repeal of phaseout extended for 2011 and 2012
• Phaseout would reduce exemption amount by 2% for every
$2,500 in excess of the phaseout threshold
• 2009 phaseout thresholds were $166,800 for taxpayers filing
single and $250,200 for married taxpayers filing jointly
– Exemption amounts:
• $3,650 in 2010; $3,700 in 2011
11
Personal Income Tax:
Deductions
• Standard Deduction
– Married taxpayers filing jointly will have standard
deduction equal to twice the standard deduction for a
single taxpayer for 2011 and 2012
– Single taxpayers allowed a standard deduction of
$3,000 (as adjusted for inflation)
• $5,700 for 2010; $5,800 for 2011
– Beginning 2013, standard deduction will be $5,000 (as
adjusted for inflation) for married taxpayers filing
jointly
12
Personal Income Tax:
Deductions
• Itemized Deductions (State and Local Sales Tax)
– Taxpayer may elect to deduct income taxes or sales
taxes as an itemized deduction
• Option extended to 2010 and 2011
– If deducting sales tax, taxpayer may choose to deduct
(1) actual sales tax paid or (2) sales tax determined by
IRS tables plus sales tax paid on purchase of motor
vehicles and watercraft
• Election is useful for taxpayers that make large purchases
during the year (i.e. engagement rings) or taxpayers in states
without income taxes (i.e. Florida)
13
Personal Income Tax:
Deductions
• Itemized Deductions (Mortgage Insurance
Premium)
– Taxpayer pays premiums for home mortgage
insurance if unable to pay entire downpayment
– Deduction for mortgage insurance premiums
extended for 2011
14
Personal Income Tax:
Deductions
• Itemized Deductions (Phaseouts)
– Repeal of phaseout of itemized deductions extended
to 2011 and 2012
– Beginning 2013, if income exceeds phaseout
threshold, itemized deductions reduced by lesser of:
• 3% of taxpayer’s income in excess of phaseout threshold, or
• 80% of itemized deductions
– Phaseout threshold is $100,000 (as adjusted for
inflation)
• Threshold was $166,800 in 2009
15
Personal Income Tax:
Exclusions
• Charitable IRA Distribution
– Taxpayer can make distribution of no more than
$100,000 to charitable organization without including
such amount in reportable income
• Extended to 2010 and 2011
– Taxpayer must be 70.5 years old or older
– Distribution counts toward required minimum
distribution
16
Personal Income Tax: Credits
• American Opportunity Credit
– Credit extended to 2011 and 2012
– Credit equal to 100% of first $2,000 of qualified tuition
and related expenses and 25% of next $2,000
• 40% is refundable; 60% is nonrefundable
– Credit applies for student’s first four years of
education after high school
– Credit phased out if income is between $80,000-90,000
for individuals and $160,000-180,000 for joint filers
17
Personal Income Tax: Credits
• Child and Dependent Care Credit
– Credit extended to 2011 and 2012
– Credit equal to 35% of qualifying child or dependent
care expenses
• Maximum credit of $2,100
• Subject to phaseout
18
Personal Income Tax: Credits
• Child Tax Credit
– Credit extended to 2011 and 2012
– Credit equal to $1,000 per qualifying child
• Beginning 2013, credit will be $500 per qualifying child
• Subject to phaseouts
19
Personal Income Tax: Credits
• Earned Income Tax Credit
– Credit extended to 2011 and 2012 for low income
taxpayers
– Maximum credit of $5,666 for taxpayer with three or
more qualifying children; Maximum credit of $457 for
taxpayer with no qualifying children
• Subject to phaseouts
20
Personal Income Tax: Credits
• Energy Credit
– Credit extended to 2011 for purchase of nonbusiness
energy property (doors, windows, insulation, certain
heat pumps, etc.)
– Credit limited to 10% of cost of property, for
maximum of $500
• 2010 credit was limited to 30% of cost of property for
maximum of $1,500
21
Business Income Tax: Rates
• No changes
22
Business Income Tax:
Deductions
• Bonus Depreciation
– Extended for qualifying property placed in service
before 2013
– If qualified property is purchased after 2007 and
placed in service before 2013, additional depreciation
equal to 50% of cost of property can be depreciated in
first year that property is placed in service
– Bonus depreciation of 100% if property acquired after
September 8, 2010 and placed in service before 2012
23
Business Income Tax:
Deductions
• Section 179 Expensing
– Increase 2012 limitation from $25,000 to $125,000
• Limitation is $500,000 for 2010 and 2011
• Limitation is $25,000 for 2013 and later
– 2012 limitation reduced by amount that Section 179
property placed in service during the year exceeds
$500,000
• No expense if company invests $625,000 in Section 179
property
• Investment limitation was $2,000,000 for 2010 and 2011;
investment limitation is $200,000 for 2013 and later
– 2012 limitation amounts of $125,000 and $500,000 to
be adjusted later for inflation
24
Business Income Tax: Credits
• New Markets Tax Credit
– Extended to 2010 and 2011
– Taxpayers allowed credit for investment in qualified
community development entities
• Credit is 5% of investment for first three years; 6% of
investment for subsequent four years
– National limitations on credit allowed
• $3.5 billion for 2010 and 2011
– Unused amounts may be carried forward until 2016
25
Business Income Tax: Credits
• Work Opportunity Credit
– Hiring deadline extended to December 31, 2011
• Original hiring deadline was August 31, 2011
– Employer allowed a credit equal to 40% of each
employee’s first $6,000 of wages for employees from
certain groups
• Groups: qualified IV-A recipients, qualified ex-felons,
designated community residents, qualified SSI recipients
• Credit given for first $3,000 of wages of qualified summer
youth employee and first $12,000 of qualified veteran
26
Business Income Tax: Credits
• Employer Provided Child Care Credit
– Credit extended for 2011 and 2012
– Employer allowed credit equal to 25% of qualified
child care expenditures (construction costs, operating
costs, contract with child care facility) plus 10% of
qualified child care resource and referral
expenditures
– Credit limited to $150,000
27
Estate & Gift Tax: Overview
• Estate Tax
– Enacted in 1916
– Taxes accumulated wealth of decedent, less
deductions, and subject to credits
– 2009 Statistics:
• 33,515 returns filed (~1.3% of decedents)
• 14,713 returns filed subject to tax (~0.6% of decedents)
• $20,643,664,000 tax due (~0.98% of federal revenue)
• Gift Tax
– Backstop to estate tax: Prevent a person from
avoiding estate tax by disposing of entire wealth
during lifetime
28
Estate & Gift Tax: Credits
• Estate Tax
– Gross estate includes all property owned by decedent
at death
– Deductions allowed for debts, liabilities,
administrative and funeral expenses
– Deduction for any gifts to charities
– Deduction for any distribution to surviving spouse
– Estate tax rate applied against taxable estate
– Unified credit against estate tax
29
Estate & Gift Tax: Credits
• Gift Tax
– Backstop to estate tax
– Gifts between spouses are not taxable
– Gifts to a recipient worth less than the annual
exclusion are excluded from tax
– Gifts not to spouse and in excess of annual exclusion
are subject to gift tax rates
– Gift tax reduced by unified credit (not always equal
to estate tax unified credit)
30
Estate & Gift Tax: Credits
• 2009 Example
– Maximum Estate Tax Rate: 45%
– Estate Tax Unified Credit: $1,455,800
• Excludes $3.5 million from estate tax
– Maximum Gift Tax Rate: 45%
– Gift Tax Unified Credit: $330,800
• Excludes $1 million from gift tax
– Gift Tax Annual Exclusion: $13,000
• If spouse agrees to split gift, exclusion is $26,000
31
Estate & Gift Tax: Credits
• 2009 Example
– John dies in 2009 with $10 million of assets
• Debts/expenses of $1 million
• Left $3 million to his wife, the rest goes to children
– John will have taxable estate of $6 million
• Exclude additional $3.5 million for unified credit
– Estate tax: $1.125 million
• 45% of $2.5 million
32
Estate & Gift Tax: Credits
• 2009 Example
– John gives $3 million to his wife and $6 million to
children
• Gift to wife is not taxable
• If John has 5 children and wife agrees to gift split, $130,000 of
children’s gifts are not taxable
– Remaining $5,870,000 subject to gift tax
– Exclude additional $1 million for unified credit
– Gift tax: $2,191,500
• 45% of $4,870,000
33
Estate & Gift Tax:
2010 Estate Tax
• 2010 issues before tax bill
– NO ESTATE TAX
– Maximum gift tax rate is 35%
• Gift tax unified credit applicable exclusion amount remains
$1 million
• Annual exclusion remains $13,000
– Assets transferred to heirs do not receive step-up in
basis
• If decedent bought stock in 1950s for $5/share and stock is
now worth $100/share, heir’s basis in stock remains
$5/share.
34
Estate & Gift Tax:
2010 Estate Tax
• Notable 2010 deaths
– Mary Janet Morse Cargill (widowed)
• Heir to family-owned agriculture empire
– Dan L. Duncan (married)
• Majority owner of Enterprise Products, an oil and gas
company
– Walter H. Shorenstein (widowed)
• Real estate developer
– George Steinbrenner (married)
• Owner of New York Yankees
– John W. Kluge (married)
• Television industry mogul
35
Estate & Gift Tax:
2010 Estate Tax
• Notable 2010 deaths
– Estimated net worth:
•
•
•
•
•
•
Cargill – $1.7 billion
Duncan – $9 billion
Shorenstein – $1.1 billion
Steinbrenner – $1.1 billion
Kluge – $6.5 billion
TOTAL NET WORTH: $19.4 billion
– Estate taxes saved: $8.73 billion
36
Estate & Gift Tax:
2010 Estate Tax
•
2010 Estate Tax Reinstated
–
Estate has options for 2010
1. DEFAULT: Estate tax under new 2010 rules
•
•
•
•
Estate tax due
35% estate tax rate
$5 million applicable exclusion amount
Heirs receive stepped-up basis in assets
2. ELECTION: No estate tax under original 2010 rules
• No estate tax due
• Heirs receive carryover basis of assets
• $1.3 million of additional basis can be allocated to
assets
• $3 million of additional basis can be allocated to assets
distributed to surviving spouse
37
Estate & Gift Tax: Estate Tax
• Estate tax reinstated for 2010 at 35%
• Estate tax rates reduced for 2011 and 2012
– Without passage of bill, rate would be 55%
• Applicable exclusion amount increased to $5
million
– 2012 amount to be adjusted for inflation
ESTATE TAX
2009
2010
2011
2012
2013
Rate
45%
35%
35%
35%
55%
$3.5M
$5M
$5M
$5M
$1M
Exclusion
38
Estate & Gift Tax: Estate Tax
•
Portability
–
If one person dies without using full unified credit,
surviving spouse is able to utilize unused credit
•
•
Both spouses must die in 2011 or 2012, unless new laws
extend portability beyond 2012
Surviving spouse able to use unused credit of last deceased
spouse
– If wife’s husband dies January 2011, she remarries
October 2011, her new husband dies in February 2012
and she dies in July 2012, she will only be able to utilize
unused credit of second husband
39
Estate & Gift Tax: Gift Tax
• Gift tax rate remains 35% for 2010, 2011 and 2012
• Applicable exclusion amount increased to $5
million
– 2012 amount to be adjusted for inflation
GIFT TAX
2009
2010
2011
2012
2013
Rate
45%
35%
35%
35%
55%
Exclusion
$1M
$5M
$5M
$5M
$1M
40
Thank You
R. Nicholas Nanovic, Esq.
nnanovic@thslaw.com
www.thsLaw.com
1611 Pond Road Suite 300 Allentown, PA 18104 ● 610-391-1800 ● 610-391-1779 (fax)
41
CIRCULAR 230 DISCLOSURE
To ensure compliance with requirements imposed by the
IRS, we inform you that unless specifically provided
otherwise in this communication (including any
attachments), any U.S. federal tax advice contained in
this communication (including any attachments) does
not constitute a “reliance opinion” as defined in IRS
Circular 230 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 transaction or taxrelated matter addressed herein.
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