a Wolters Kluwer business

a Wolters Kluwer business 4025 W. Peterson Ave. Chicago, IL 60646-6085 I 800 248 3248 www.CCHGroup.com HIGHLIGHT,S o 2010 TAX LEGISLATIO Tax Relief, Unemploymen Insurance Reauthorizatio and Job Creation Act of 2010 • RIC Modernization Act of 2010 EFTA01221462 HIGHLIGHTS of 2010 TAX LEGISLATION Tax Relief, Unemployment Insurance Reathorization, and Job Creation Act of 2010 • RIC Modernization Act of 2010 CCH Editorial Staff Publication CCH a Wolters Kluwer business EFTA01221463 2 HIGHLIGHTS of 2010 Tax Legislation 3 This publication is designed to provide accurate and au- thoritative information in regard to the subject matter cov- ered. It is sold with the understanding that the publish- er is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought In the course of preparing this publication, the publisher has randomly selected names for use In providing examples and de- scribing situations:Any similarityto persons kiting or dead, fictional or nonfiction,* is purely coincidental and the publisher disclaims any responsibility of liability therefore. ISBN 978.0.8080.2610-5 02010 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 swnv.CCHGroup.com No claim is made to original government works; however, within this Product or Publication, the followingare subject toCCH's copyright: (1) thegatheting,compRation, and arrangement of suchgovernment materials; (2) the magnetic translation and digital conversion of data, if applicable; (3) the historical, statutory,and other notes and references; and (4) the commentary and other materials. Printed In the United States of America ( 0 FCRES sustedtatt E Certified Fiber Sourcing TRY Num M www.sliprogram.ore CONTENTS Introduction 5 Lower Tax Rates Extended 7 Individual Tax Rates 7 Marriage Penalty Relief 8 Relief from Deduction Limitation and Exemption Phaseout 9 Lower Rates on Capital Gains and Dividend Income Extended 10 Alternative Minimum Tax Relief 12 AMT Exemption Amounts 12 AMT Nonrefundable Personal Credits 13 Income, Deductions, and Credits for Individuals 14 Incentives for Education Extended 14 Incentives for Families Extended 15 Other Deductions Extended 18 Other Credits Extended 18 Other Exclusions Extended 21 Investment Extensions and Incentives 22 Bonus Depreciation 22 Accelerated AMT Credit in Lieu of Bonus Depreciation 23 Code Section 179 Deduction 24 Qualified Leasehold, Retail, Restaurant Property 25 Exclusion of Gain on Certain Small Business Stock 25 Community Assistance Provisions 25 Business Deductions and Credits 26 Deductions 26 Credits 27 Energy Provisions 28 Payroll Tax Cut 29 Estate and Gift Taxes 30 Estate Tax 31 Basis Rules 33 EFTA01221464 4 HIGHLIGHTS of 2010 Tax Legislation . • • Gift Tax 33 Generation-Skipping Transfer Tax 34 Optional Rules for 2010 34 Income Tax Exclusion for Sale of Principal Residence 35 Filing Relief 36 2013 Sunset Provision 36 Miscellaneous Provisions 37 Dividends of Regulated Investment Companies ...... 37 S Corporation Basis Adjustment for Charitable Donations 37 Regulated investment Companies 37 INTRODUCTION On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). This $858-billion pack- age impacts a broad cross-section of taxpayers. One of its more sweeping provisions is the exten- sion of all 2001 and 2003 Bush-era tax cuts for two more years, through 2012. As enacted, these were to "sunset" after 2010. The new Act delays this sunset for two years. Thus, the tax rates for income earned by individuals, as well as for capi- tal gains and dividend income, will remain at the lower rates that have been in effect in recent years. More than 50 other tax incentives have also been extended by this provision, including the expanded earned income tax credit, the $1,000 child tax credit, and the increased dependent care credit, to name just a few The tax package contains a highly contentious estate tax relief provision that solves (at least temporarily) the much-publicized issues of what form the estate tax should take, and whether there would be a tax on estates at all in 2010. The agreement reached by the White House and Congress solves the first issue by excluding estates below $5 million from taxation and pro- viding a top tax rate of only 35 percent, and the second issue by essentially making the estate tax optional in 2010. The bill also includes other key changes, including ■ an extension of the AMT patch through 2011, ■ a reduction in the Social Security payroll tax from 6.2% to 4.2% for 2011, and EFTA01221465 6 HIGHLIGHTS of 2010 Tax Legislation 7 ■ an allowance for 100 percent business expens- ing for one year. It also extends several tax benefits that had expired at the end of 2009, including the de- duction for the classroom expenses of teachers, the deduction for state and local sales taxes, the credit for new research expenditures, and credit for building new energy efficient homes. Included as part of the compromise to get the bill passed, unemployment benefits have been extended for 13 more months, through the be- ginning of 2012. A lesser-known bill, the Regulated Investment Company Modernization Act, was also signed into law. It is intended to simplify the rules that apply to mutual funds and to ensure that small investor groups are treated equally with direct individual investors. LOWER TAX RATES EXTENDED Individual Tax Rates The current individual income tax rates, which have been in place for most of the past decade, have been extended for two more years, through 2012. These rates are: 10%, 15%, 25%, 28%, 33%, and 35%. Planning Note. After 2012, the individual income tax rates are set to revert back to 15%, 28%, 31%, 36%, and 39.6%. Notice that there is no 10% bracket, and the other brackets, other than the 15% bracket, are slightly higher than the ones currently in place. Comment. Several related reductions in withholding rates were also extended, including the backup withholding rate, which will remain equal to 28% through 2012. The tax rate schedules for 2011 are as follows: SINGLE TAXPAYERS If taxable income is: Theta is: Over— But not over— of the amount over- 50 $8,500 10% $0 8,500 34,500 $850 + 15% 8,500 34,500 83,600 4,750 + 25% 34,500 83,600 174,400 17,025 + 28% 83,600 174,400 379,150 42,449 + 33% 174,400 379,150 110,016.50 + 35% 379,150 MARRIED INDIVIDUALS If taxable Income is: f ILING SEPARATE RETURNS The tax Is: Over— but not over— of the amount over— SO 58,500 10% SO 8,500 34,500 5850+15% 8,500 34,500 69,675 4,750+25% 34,500 69,675 106,150 13,543.75 + 28% 69,675 106,150 189,575 2%756.75 + 33% 106.150 189,575 51,287 + 35% 189,575 EFTA01221466 8 HIGHLIGHTS of 2010 Tax Legislation 9 MARRIED INDIVIDUAL AND SURVIVING SPOUSES FILING JOIN r 'SPURNS taxable income Is: The taxis: Over— but not over— of the amount over— SO $17000 10% SO 17000 69 000 $1 700 +15% 17000 69000 139 50 9 00+25% 69 000 139 50 212 00 27087.50 +28% 139 350 212,300 379,150 47513.50 +33% 212 300 379,150 102 574 + 35% 379150 HEADS OF HOUSEHOLDS if taxable income is: The taxis: Over— but not over— of the amount over— $0 $12,150 10% $0 12150 46,250 51,215 +15% 12,150 46,250 119 400 6,330 + 25% 46,250 119,400 193,350 24,617.50 + 28% 119,400 193,350 379,150 45,323.50 + 33% 193,350 379,150 106,637.50 + 35% 379,150 ‘' "E .., RJS -‘ If taxable Income Is: The taxis: Over— but not over— of the amount over— SO $2,300 15% $0 2,300 5,450 5345 + 25% 2,300 5,450 8,300 1,132.50 + 28% 5,450 8,300 11,350 1,930.50+ 33% 8,300 11,350 2,937 + 35% 11,350 Marriage Penalty Relief A 'marriage penalty* exists if a couple would pay higher combined taxes if they were married than if they were not. The new law extends through 2012 certain provisions designed to help mini- mize the marriage penalty. These provisions were to sunset for 2011. To begin with, the 15% tax bracket for a married couple filing a joint return will remain at twice the 15% bracket for unmarried individuals. Similarly, the standard deduction for a mar- ried couple filing a joint return will remain at twice the basic standard deduction for unmar- ried individuals. Comment. The standard deduction is adjusted for inflation each year. In 2011, the amount of the standard deduction is $5,800 for unmarried individuals and married individuals filings separately, $11,600 for married individuals filing jointly, and $8,500 for heads of households. Finally, previous modifications to the earned income credit (EIC) will remain in place, includ- ing an increase in the phaseout amount for married taxpayers to $5,000 more than the amount used for other taxpayers (indexed for inflation). Relief from Deduction Limitation and Exemption Phaseout The new law extends through 2012 the favorable treatment given to itemized deductions and per- sonal exemptions for high income individuals. Before 2010, the total amount of itemized de- ductions was limited for high-income taxpayers. For example, these deductions were restricted in 2009 for taxpayers making more than $166,800 ($83400 for married individuals filing separate returns). However, this restriction was eliminated for 2010, meaning that high-income taxpay- ers could claim all of their itemized deductions. EFTA01221467 10 HIGHLIGHTS of 2010 Tax Legislation 11 The limitation was to come back into effect in 2011. However, the elimination of the overall limitation has now been extended, so there is no overall limitation on itemized deductions in either 2011 or 2012. Caution. Only the overall limitation is repealed. Separate limitations may still apply to individual deductions. Similarly, before 2010, the deduction for per- sonal exemptions was reduced or eliminated for certain high-income taxpayers. For exam- ple, in 2009, the exemption was reduced for single individuals with income over $166,800, married individuals filing a joint return with income over $250,200, heads of households with income over $208,500, and married indi- viduals filing separate returns with income over $125,100. This limitation was eliminated for 2010, however, and therefore you could claim your entire exemption no matter your income level. This same treatment will now apply for 2011 and 2012. Comment. The exemption amount is adjusted for inflation each year. In 2011, the exemption amount is 53,700. LOWER RATES ON CAPITAL GAINS AND DIVIDEND INCOME EXTENDED Your capital gains and qualified dividends will continue to be taxed through 2012 as they have been for the past few years. Thus, your capital gains and dividend income will generally be taxed at 15%. If you arc in the 10% or 15% income tax bracket, however, your capital gains and dividend income will not be taxed at all. Comment. These rates apply for both regular and alternative minimum tax (AMT) purposes. Planning Note. After 2012, capital gains will generally be taxed at a 20% rate, although property held for more than 5 years will be taxed at 18%. Lower-income taxpayers (those in the 15% income tax brackets) will instead be taxed on their capital gains at a 10% rate, lowered to 8% for property held for more than 5 years. Qualified dividends are set to be taxed at ordinary income rates after 2012. Comment. Several related provisions that apply to corporations were also extended through 2012, including: e The reduction in the tax rate on corporate accumulated earnings to 15%. ■ The reduction in the tax rate on personal holding companies to 15%. • The repeal of the collapsible corporation rules. The 0-percent capital gains rate that applies to capital gain from the sale of certain assets used in the DC Zone and held for five years is also extended for two years. Thus, taxpayers can exclude gain attributable to transactions occur- ring through December 31, 2016. 'the eligible property must be purchased or substantially im- proved before January 1, 2012. EFTA01221468 12 HIGHLIGHTS of 2010 Tax Legislation 13 ALTERNATIVE MINIMUM TAX RELIEF AMT Exemption Amounts Individuals who might be subject to the alter- native minimum tax (AMT) will be pleased to know that the exemption amounts have been increased for both 2010 and 2011. This means that more income will be sheltered from taxation under the AMT. For 2010, the exemption amounts are: ■ $47,450 for unmarried individuals; ■ $72,450 for married individuals filing a joint return and surviving spouses; and ■ $36,225 for married individuals filing separate returns. For 2011, the exemption amounts arc: ■ $48,450 for unmarried individuals; is $74,450 for married individuals filing a joint return and surviving spouses; and ■ $37,225 for married individuals filing separate returns. Comment. The $40,000 exemption amount for corporations and the $22,500 exemption amounts for estates or trusts continue to remain unchanged. Comment. While many provisions in the new law are prospective, looking forward to 2011and 2012, the ANT relief instead applies to the current year, 2010, as well as the next year, 2011. Planning Note. Unless Congress takes further action, the exemption amounts will revert for 2012 and later years to the amounts in place before 2001: $33,750 for unmarried individuals, $45,000 for married individuals filing a joint return and surviving spouses, and $22,500 for married individuals filing separate returns. AMT Nonrefundable Personal Credits You may continue in 2010 and 2011 to claim all nonrefundable personal tax credits against both your regular tax and your AMY Without this extension, certain credits could have been lim- ited or disallowed when calculating your AKE The available nonrefundable personal tax credits in 2010 and 2011 are: the dependent care credit, the credit for the elderly and disabled, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits (including the American Op- portunity tax credit), the credit for savers, the credit for certain non-business energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehi- cles, and the D.C. first-time homebuyer credit. Without further legislative action, only the follow- ing nonrefundable personal credits will be fully allowed against your AMT liability in 2012 and later years (subject to separate special limitations): ■ Child tax credit ■ Adoption credit EFTA01221469 14 HIGHLIGHTS of 2010 Tax Legislation 15 ■ American Opportunity tax credit ■ Retirement savings contributions credit (e.g., the Savers' credit) ■ Residential energy efficient property credit ■ Small plug-in vehicles credit ■ New plug-in electric drive motor vehicles credit ■ Alternative motor vehicles credit Comment. In 2010 and 2011, the adoption credit is refundable,whichmeansthatit isnot subject to these !tiles and is not included in the list of nonrefundable personal credits allowed against the AMT in 2010 and 2011. After 2011, the credit will revert to being nonrefundable and is therefore included in the above list of nonrefundable personal credits that will be allowed against the AMT in 2012 and later years. Either way, the credit is fully allowed against the AMT for all of these years. The other nonrefundable personal credits will be allowed after 2011 only to the extent your regu- lar tax liability exceeds your tentative minimum tax (determined without regard to the AMT for- eign tax credit). INCOME, DEDUCTIONS, AND CREDITS FOR INDIVIDUALS Incentives for Education Extended Several tax incentives designed to help pay for education costs are extended. These include the following: ■ Enhancements made to the deduction for student loan interest are extended through 2012. Thus, the phaseout for upper-income taxpayers will remain higher than it would have been, and you can otherwise continue to deduct all interest paid (and not just interest paid during the first 60 months). ■ The availability of the above-the-line deduc- tion for your own, your spouse's, or your qualifying dependents higher education ex- penses paid during the year has been extended through 2011. ■ The more favorable rules for Coverdell education savings accounts, designed to help beneficiaries pay for education expenses, arc extended through 2012. ■ The availability of the American Opportunity tax credit to help pay for tuition costs is ex- tended through 2012. ■ The exclusion from income of up to $5,250 of employer-provided educational assistance is extended through 2012. ■ The exclusion from income for scholarships awarded through the NHSC Scholarship Program or the Armed Forces Scholarship Program is extended through 2012. Incentives for Families Extended A number of incentives designed to help families have been extended through 2012. As discussed in more depth below, these include the child tax credit, the adoption credit and exclusion for employer-provided adoption assistance, the de- pendent care credit, and enhancements to the earned income credit (ETC). The employer-pro- vided child care tax credit has also been extended, as discussed further on page 17. EFTA01221470 16 HIGHLIGHTS of 2010 Tax Legislation 17 Child Tax Credit You may be able to claim a tax credit for each of your children who are under the age of 17. The new law extends the $1,000 per child credit for two years, through 2012. It was scheduled to drop to $500 per child after 2010. Other en- hancements to the credit are also extended for two years, including the earned income refund- able component. Comment. If you have a family with three or more children, you may determine the refundable amount using an alternative formula. Adoption Credit and Exclusion If you adopt a child, you can receive help paying for your adoption expenses by claiming the adop- tion credit and by excluding from your income a certain amount of adoption assistance provided by your employer, if any. The amount that can be claimed as a credit or excluded from income is $13,170 in 2010 and $13,360 in 2011, al- though these amounts are phased out for certain high-income taxpayers. Both the credit and the exclusion were set to revert after 2011 to less generous rules, but both of these benefits have been extended in their current forms to 2012. The amount of the credit and exclusion have decreased slight- ly for 2012, to $12,170, adjusted for inflation after 2010, and the credit will no longer be refundable. Dependent Care Credit If you pay someone to look after your child while you work, you might be eligible for the depen- dent care credit. The maximum credit amount is $1,050 if you have one dependent or $2,100 if you have two or more dependents. However, both of these amounts may be reduced (but not totally eliminated) if your adjusted gross income is greater than $15,000. The amount of the credit was set to decrease after 2010, but it has instead been extended in its cur- rent form through 2012. Earned Income Credit Low and moderate-income taxpayers may be eligible for the earned income credit (EIC), depending on their income, filing status, and immigration and work status. If you are eli- gible, the amount you receive depends on the number of children in your family, how much income you earn, and the amount of your ad- justed gross income. For taxpayers with three or more eligible chil- dren, the credit percentage used to calculate the EIC was increased for 2009 and 2010 to 45 percent (up from 40 percent). This treatment is extended through 2012. Comment. Other changes to the EIC were also extended through 2012. One such provision is the Increase in the phase-out amount for married taxpayers. See page 9. EFTA01221471 18 HIGHLIGHTS of 2010 Tax Legislation 19 Other Deductions Extended Several other deductions that were set to expire have been extended: ■ If you are a teacher, the above-the-line deduc- tion for your classroom expenses, such as sup- plies, has been extended for 2010 and 2011. ■ The election to deduct your state and local general sales taxes instead of your state and local income taxes has been extended to years 2010 and 2011. This election is especially valuable if you live in a state that does not impose income taxes. ■ If you entered into a mortgage contract after 2006, the deduction for private mortgage in- surance (PM!) premiums has been extended one more year, through 2011. ■ If you would like to contribute capital gain property to a charity for conservation purposes in 2011, or if you contributed such property in 2010, you can deduct the fair market value of the property up to 50 percent of your adjusted gross income (100 percent if you're a farmer or rancher). Comment. The deduction limit for capital gain property contributed to a charity for reasons other than conservation is 30 percent of your adjusted gross income. Other Credits Extended Non-Business Energy Property Credit The credit for the purchase and installation of non-business energy property has been extend- ed for one more year. Thus, in 2011, you may continue to claim a credit for purchasing and installing in your home certain qualified energy efficient improvements, such as energy-efficient insulation, windows, doors, and roofs, or certain residential energy property, such as efficient heat pumps, circulating fans, and air conditioners. However, although the credit has been extended, it has also been modified for 2011 to reinstate the less favorable credit structure, credit rates, and higher efficiency standards that were in place before February of 2009 (and enactment of the American Recovery and Reinvestment Act (P.L. 111-5)). Thus, you can claim only 10 percent of the cost of qualified energy efficient improvements, and only a certain dollar amount for residential energy property expenditures, de- pending on the type of property. These dollar amounts are $50 for advanced main air circulat- ing fans, $150 for qualified boilers, and $300 for qualified energy efficient building property such as certain heaters and air conditioners. There is also a $500 lifetime limitation, meaning that the amount of the credit you can claim in 2011 is limited to $500 reduced by all of the credits for non-business energy property you claimed from 2006 through 2010. Also, a lifetime limitation applies to skylights and window, so only $200 of the credit may be allocated to exterior windows and skylights in any year, and that $200 amount must be reduced by the aggregate amount of the credit you previously received for windows and skylights from 2006 through 2010. Comment. The lifetime limitations look back at the credits claimed in 2006, 2007, 2009, and 2010 — the credit was not available in 2008. EFTA01221472 20 HIGHLIGIITS of 2010 Tax Legislation 21 Example. In 2011, Lisa and Tom purchase new windows for $500 and an electric heat pump for $1,500. The windows qualify as energy efficient improvements and the heat pump qualifies as energy efficient building property. Therefore, they can claim a non-business energy property credit in 2011 of $50 for the windows ($500 times 10%) and $300 for the heat pump, for a combined credit of $350. The amount of the credit would be limited, however, if Lisa and Tom had claimed more than $150 as a credit in a previous year ($500 minus $350), or had claimed more than $150 as a credit with respect to windows or skylights in a previous year ($200 minus $50). For example, if, in 2007 and 2010, they had claimed an aggregate credit of $300 (stemming from property other than windows and skylights), then, in 2011, Lisa and Tom can only claim a maximum credit of $200 ($500 minus $300). Comment. In 2009 and 2010, you could claim up to 30 percent of the costs of all non-business energy property. The only dollar limitation was a $1,500 lifetime limitation that applied only to 2009 and 2010. D.C. Homebuyer Credit The $5,000 tax credit for certain individuals who purchase a home in Washington, D.C., has been extended to include homes purchased before January I, 2012. Comment. While this credit applies only to first-time homebuyers, its definition of a first-time homebuyer is much more forgiving than the definition of a first-time homebuyer for purposes of the separate homebuyer credits that have been, until recently, available nationally. Other Exclusions Extended IRA Distributions for Charitable Purposes If you have an IRA, you can distribute up to $100,000 from the IRA to a qualified charity and not pay tax on the distribution. Taxpayers can continue to make such tax-free distribu- tions in 2010 and 2011, and can elect to treat any such distributions made in January of 2011 as if they were made in 2010. This election allows the distribution to count towards the 2010 $100,000 limitation, as well as the 2010 required minimum distribution, which is help- ful because the extension was not enacted into law until the end of 2010, giving little time to plan your 2010 charitable giving. Van-Pool and Mass Transit Benefits If your employer helps you get to work by giving you mass transportation benefits or access to a vanpool, the value of such benefits may be ex- cludable from your income. Since early in 2009, the excludable amount has been equal to the exemption amount available to employees who receive employer-provided parking benefits. This equal treatment has been extended through the end of 2011. Comment. The exempt amount is adjusted each year for inflation, and was $230 per month in 2010. EFTA01221473 22 HIGHLIGHTS of 2010 Tax legislation 23 INVESTMENT EXTENSIONS AND INCENTIVES Bonus Depreciation The 50 percent first-year bonus depreciation al- lowance is extended for two more years, and has also been enhanced for part of that time period. The extension applies so that the bonus applies to qualified property acquired after December 31, 2007, and placed in service before January 1, 2013 (January 1, 2014, for property with a longer production period and certain non-com- mercial aircraft). The enhancement allows a larger bonus to be claimed for certain property. The first-year bonus depreciation allowance rate is increased from 50 percent to 100 percent for qualified property acquired after September 8, 2010, and before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, for longer period production property and certain noncommercial aircraft). Thus, the allowance rate for additional first-year depreciation is generally equal to: ■ 50 percent of the cost of qualified property placed in service after December 31, 2007, and on or before September 8, 2010. ■ 100 percent of the cost of qualified property placed in service after September 8, 2010, and before January 1, 2012. ■ 50 percent of the cost of qualified property placed in service after December 31, 2011, and before January I, 2013. Comment. As under existing law, taxpayers can elect not to claim bonus depreciation. However, the new law does not contain a provision allowing taxpayers to elect 50-percent bonus depreciation for property qualifying for 100-percent bonus depreciation. The $8,000 increase in the first-year de- preciation cap for vehicles on which bonus depreciation is claimed remains unchanged and continues to apply to vehicles placed in service in 2011 and 2012 for which bonus deprecia- tion is claimed, including property for which 100 percent bonus depreciation is claimed. Accelerated AMT Credit in Lieu of Bonus Depreciation A corporation may elect to accelerate its AMT credit (attributable to an unused pre-2006 minimum tax credit) by forgoing bonus depre- ciation on "round 2 extension property," which is property eligible for bonus depreciation solely by reason of the new extension of the bonus depreciation. Under the prior accelera- tion provision, which applied to a corporation's first tax year ending after March 31, 2008, a corporation could also claim unused pre-2006 research credits by forgoing bonus deprecia- tion. The new law only allows a corporation to increase the minimum tax credit limitation by the bonus depreciation amount computed with respect to round 2 extension property and claim pre-2006 AMT credits that may remain after reduction by accelerated AMT credits that were claimed by reason of a prior election to forgo bonus depreciation. EFTA01221474 24 HIGHLIGHTS of 2010 Tax Legislation 25 Code Section 179 Deduction For tax years beginning in 2012, the maximum amount of the 179 deduction is increased to $125,000, and the deduction is limited if the cost of 179 property placed in service during the year exceeds $500,000. Both the $125,000 and the $500,000 amounts are adjusted for inflation. Comment. For 2010 and 2011, the dollar limit is $500,000 and the investment limit is $2 million. These limits were set to decrease to $25,000 and $200,000 in 2012, but this decrease is now delayed until 2013. The provisions allowing expensing of off-the- shelf computer software and revocation of Section 179 elections without IRS consent are also extended one year, through 2012. However, the provision allowing expensing of qualified real property is not extended, and applies only for property placed in service in 2010 and 2011. Comment. The entire cost of most new depreciable section 1245 property acquired after September 8, 2010, and placed in service before January 1, 2012, can be claimed as a 100-percent bonus depreciation deduction, as explained above. A taxpayer will receive the greatest benefit from Code Sec. 179 by expensing property that does not qualify for bonus depreciation (e.g., used property) and property with a long MACRS depreciation period. For example, given the choice between expensing an item of MACRS five-year property and an item of MACRS 15-year property, the 15-year property should be expensed since it takes 10 additional tax years to recover its cost through annual depreciation deductions. Qualified Leasehold, Retail, Restaurant Property Fifteen-year straight line depreciation for quali- fied leasehold, retail, and restaurant property has been extended for qualified property placed in service before January 1, 2012. Comment: For tax years 2010 and 2011, qualified leasehold, retail, and restaurant property are also eligible for the Code Section 179 deduction. The amount that can be expensed under this provision is limited to $250,000. Exclusion of Gain on Certain Small Business Stock A non-corporate taxpayer who holds qualified small business stock for more than five years generally can exclude from income 50 percent of any gain realized on the sale or exchange of the stock. The exclusion was previously increased to 100 percent for stock acquired after September 27, 2010, and before January 1, 2011, and now this increase has been extended for one year to include stock acquired before January 1, 2012. Comment. A 75-percent exclusion of gain from the sale or exchange of qualified small business stock is available for qualified small business stock acquired after February 17, 2009, and before September 27, 2010. Community Assistance Provisions The following community assistance provisions have been extended through December 31, 2011: ■ Washington, D.C. Empowerment Zonc Designation EFTA01221475 26 HIGHLIGHTS of 2010 Tax Legislation 27 ■ Gulf Opportunity Zone Tax Incentives ■ Empowerment Zone Tax Incentives Tax benefits related to the Washington, D.C. Empowerment Zone include the D.C. first- time homebuyer credit (see page 20) and the 0-percent capital gains rate for certain assets used in the D.C. Zone and held for five years (see page 11). BUSINESS DEDUCTIONS AND CREDITS Deductions Enhanced Corporate Charitable Deduction Special rules applied to corporate donations of food, books, and inventory made before January 1, 2010, that resulted in a larger charitable de- duction. These rules have now been extended to apply to corporate donations of eligible property made before January 1, 2012. Environmental Remedlation Expenses The deduction for qualified environmental re- mediation expenses has been extended for costs paid or incurred after December 31, 2009, and before January 1, 2012. A qualified environmen- tal remediation expense generally is an expense that is incurred in connection with the abate- ment or control of hazardous materials at a qualified contaminated site and that otherwise would be a capital expenditure. Other Deductions Extended The following deductions have also been extend- ed for two years, through December 31, 2011: ■ Domestic Production Activities Deduction for Puerto Rico ■ Mine Safety Equipment ■ Film and Television Expenses Credits Research Credit The credit for increasing research activities is extended for two years, through December 31, 2011. For purposes of the orphan drug credit, the research credit is deemed to remain in effect for periods after December 31, 2011. Work Opportunity Credit This credit was set to expire on August 31, 2011, but has been extended for four months, through December 31, 2011. Thus, the credit applies with respect to wages paid to persons who begin work for the employer before January 1, 2012. Comment. The credit for unemployed veterans and disconnected youths remains limited to those who begin work for the employer during 2009 and 2010. These two groups were added by the American Recovery and Reinvestment Act of 2009 (Pt 111-5), but this provision was not extended by the new Act. Credit for Employer-Provided Child Care Facilities The income tax credit for qualified expenses in- curred by an employer in providing child care EFTA01221476 28 HIGHLIGHTS of 2010 Tax Legislation 29 for employees has been extended for two years, through December 31, 2012. New Markets Tax Credit This credit has been extended for two years, through December 31, 2011, and the carryover period has been extended for two years, through 2016. The extension permits up to $3.5 billion in qualifying equity investments to be made in 2010 and 2011. Credits Extended Generally The following credits expired December 31, 2009, but have been extended through Decem- ber 31, 2011: ■ Indian Employment Credit ■ Railroad Track Maintenance Credit ■ Mine Rescue Training Credit ■ Differential Wage Payment Credit ■ American Samoa Economic Development Credit ENERGY PROVISIONS Energy Efficient Home Credit The credit for eligible contractors for the con- struction or manufacture of a new energy efficient home is extended through December 31, 2011. Depletion for Oil and Gas Wells Thesuspension ofthe percentage depletion limitation for oil and gas produced from marginal properties is extended for two years, through 2012. Thus, for tax years beginning after 1997 and before 2012, the depletion allowance for independent operators and royalty owners with respect to oil and gas produc- tion from marginal wells is limited to 100 percent of the taxpayer's taxable income from the property only for tax years beginning during 2008. Alternative Vehicle Refueling Property The alternative fuel vehicle refueling property credit is extended to apply to refueling prop- erty (other than property relating to hydrogen) placed in service through December 31, 2011. PAYROLL TAX CUT The employee's portion of Social Security taxes (old age, survivors, and disability insurance (OASDI)), included as part of payroll taxes, is reduced by two percentage points to 4.2 percent for 2011. Similarly, the OASDI portion of the self-employment tax is reduced by two percent- age points to 10.4 percent for 2011. The rate reduction is not taken into account in determining the self-employment income deduc- tion allowed for determining the amount of the net earnings from self-employment for the tax year. Thus, the deduction for 2011 remains at 7.65 percent of self-employment income. How- ever, the above-the-line deduction from income tax for 50 percent of your self-employment tax liability has been adjusted so that you may, in 2011, deduct 59.6 percent of your OASDI and 50 percent of your Medicare taxes. Employers should start using the new withhold- ing tables that have been released by the IRS and reducing the amount of Social Security tax with- held as soon as possible in 2011 but not later than EFTA01221477 30 HIGHLIGHTS of 2010 Tax Legislation 31 Jan. 31, 2011. For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers' pay as soon as possible but not later than March 31, 2011. Comment. The Tax Relief Act of 2010 does not renew the Making Work Pay Credit. Under that provision, a single taxpayer making $6,450 would receive the full $400 credit amount. Under the two-percent payroll tax deduction, an employee would need to make $20,000 to receive a $400 reduction in taxes. However, unlike the Making Work Pay credit, the two percent OASDI reduction is available to all wage earners, with no phase-out limit irrespective of income level. Thus, individuals earning at or above the OASDI cap of $106,800 would receive a $2,136 tax benefit in 2011. ESTATE AND GIFT TAXES Since 2001, federal transfer taxes, including the estate tax, gift tax, and generation-skipping transfer (GST) tax, have been drastically changed, culmi- nating in the complete repeal of the estate tax and the GST tax in 2010. The Act revives the estate tax for decedents dying after 2009, but at a signifi- cantly higher exclusion amount and lower tax rate than had been scheduled ro apply in 2011. Comment. The estate tax is revived retroactively for 2010. However, estates of decedents dying in 2010 can elect not to be subject to the estate tax and to have the prior carryover basis rules apply. Under these rules, the decedent's basis carried over to the recipients of the property. The new law also reunifies the estate and gift tax, so that the gift tax applies at the same maximum rate and with the same higher exclusion amount starting in 2011. Finally, the generation-skipping transfer tax is also reinstated in 2010, 2011, and 2012, but the rate for 2010 is 0 percent. Caution. This new regime is itself temporary and scheduled to sunset on December 31, 2012. Estate Tax The new law imposes the estate tax at a maximum rate of 35 percent with an exclusion amount of $5 million, for decedents dying after 2009 and before 2013. The estate tax is imposed according to this sched- ule, which also applies to the gift tax: (A) (B) (C) (D) Amount subject to tax equal to or more than— Amount subject to tax less than— Taxon amount in column (A) — Rate of tax on excess over amount in column (A) Percent — 510,000 18 510,000 20,000 $1,800 20 20,000 40,000 3,800 22 40,000 60,000 8,200 24 60,000 80,000 13,000 26 80,000 100,000 18,200 28 100,000 150,000 23,800 30 150,000 250,000 38,800 32 250,000 500,000 70,800 34 500,000 155,800 35 A larger applicable cxc usion amount is available to the estates of decedents dying after Decem- ber 31, 2009, and before January 1, 2013, than would have been the case had the transfer tax provisions been allowed to sunset. As a result, the EFTA01221478 32 HIGHLIGHTS of 2010 Tax Legislation 33 estate tax applicable exclusion amount increases to $5 million for the estates of decedents dying after December 31, 2009, and before January 1, 2013. This amount is indexed for inflation start- ing in 2012. After 2010, a surviving spouse may to take ad- vantage of the unused portion of the estate tax exclusion of a deceased spouse, thus increasing the available exclusion. Example. Gina Parsons died in 2011 with a taxable estate of $3 million. An election is made on Gina's estate tax return to permit her husband, Henry, to use any of her unused exclusion amount. Henry, who had not made any lifetime taxable gifts, dies in 2012 with a taxable estate of $10 million. The executor of Henry's estate computes Henry's deceased spousal unused exclusion amount as the lesser of: (1) Henrys basic exclusion amount of $5 million or (2) Gina's basic exclusion amount ($5 million) minus (3) the amount of Gina's taxable estate ($3 million), or $2 million. Accordingly, the total applicable exclusion amount available to Henrys estate at his death is $7 million: his basic exclusion amount of $5 million, plus $2 million in deceased spousal unused exclusion from Gina's estate. To take advantage of this provision, a special election must have been made by the prede- ceased spouse's estate on its estate tax return. Caution. Because this provision, like the rest of the Act's rules, is scheduled to sunset after 2012, the utility of the portability election is limited to situations where both spouses die with the two-year term (i.e. 2011-2012). Basis Rules The new law revives the traditional stepped-up basis regime for assets included in the gross estate of decedents dying after 2009 and before 2013. Property with a stepped-up basis receives a basis equal to the property's fair market value on the date of the decedent's death (or on an alternate valuation date) Thus, all gain (or loss) before the decedent's death escapes tax. Under the modified carryover basis that had been in place for 2010, the executor could increase the basis of estate property only by a total of $1.3 million, with other estate property taking a car- ryover basis equal to the lesser of the decedent's basis or the fair market value of the property on the decedent's death. An executor could increase the basis of assets passing to a surviving spouse by an additional $3 million (for a total of $4.3 million). These modified carryover rules are gen- erally repealed, except for estates of decedents dying in 2010 that opt to have these rules, rather than the estate tax, apply, as discussed below. Gift Tax Under the new law, the gift tax continues to be applied at a maximum tax rate of 35 percent through December 31, 2012. However, it is ap- plied under the unified schedule shown above. The gift tax applicable exclusion amount, which had remained at $1 million since 2002, has in- creased to $5 million, effective for gifts made after December 31, 2010, and before January 1, 2013. It is indexed for inflation beginning in 2012. EFTA01221479 34 HIGHLIGHTS of 2010 Tax Legislation 35 Comment. For 2010, it remains $1 million, as under prior law. Unlike the estate tax exclusion amount, the gift tax exclusion amount does not increase until 2011. Planning Note. The 20-point differential between the 35-percent tax rate applicable to taxable gifts in 2010 through 2012, versus the 55-percent rate that would apply in 2013 and later if these rules are allowed to sunset, coupled with the increase in the gift tax applicable exclusion amount and with depressed asset values for many types of assets, creates an atmosphere that is conducive to making taxable gifts before January 1, 2013. Generation-Skipping Transfer Tax Like the estate tax, the generation-skipping trans- fer (GST) tax had been repealed for 2010. The new law revives the GST tax, with a 0 percent rate for 2010. For 2011 and 2012, the "applicable rate" for GST purposes will be computed based on a maximum estate tax rate of 35 percent. The GST tax exemption amount, which is computed by reference to the estate tax applicable exclusion amount, is $5 million for GSTs occurring after 2009 and before 2013. The $5 million amount is indexed for inflation after 2012. Optional Rules for 2010 The executor of an estate of a decedent dying in 2010 can elect to have the estate treated as if the reinstatement had not occurred. Thus, these es- tates can elect to apply: Is the estate tax based on the new 35 percent top rate and $5 million applicable exclusion amount, with stepped-up basis; or ■ no estate tax and modified carryover basis rules. Comment. This election is not available with respect with to the GST tax because the GST rate for 2010 is 0 percent. This election must be made by the time, and in the way, provided by the IRS, and, once made, can not be changed. Comment. Presumably this election is intended to avoid the question of the unfairness of making the estate tax retroactive to estates of decedents dying in 2010 before the enactment of the new Act on December 17. It should also avoid the legal challenges that would probably have attended a purely retroactive reinstatement. Income Tax Exclusion for Sale of Principal Residence The exclusion from gross income for gain realized on the sale of a decedent's principal residence sold by a decedent's estate, heir, or qualified revocable trust was scheduled to expire for decedents dying after December 31, 2010, but it will now remain in effect with one caveat: it is only available for estates electing to apply the modified carryover basis rule. For estates of decedents dying in 2010 that do not make the modified carryover basis election and for estates of decedents dying after December 31, 2010, any gain on the sale of the decedent's principal residence is no longer eligi- ble for the exclusion. EFTA01221480 36 HIGHLIGHTS of 2010 Tax Legislation 37 Filing Relief To ensure compliance with the carryover basis rules that were to apply in 2010, reporting re- quirements were imposed on the executor of an estate, under which the executor was required to report basis information to both the IRS and to the recipients of property. In general, these reporting requirements are repealed, along with the carryover basis regime. However, they apply to estates that elect to apply the optional rules for 2010. Comment. The IRS has never issued guidance or forms related to this reporting. The new law provides estates of decedents dying after 2009 and before the date the new law was enacted with an extension of time to file estate and GST returns, regardless of whether the election to have the optional rules for 2010 apply. The extension also applies to the payment of the estate tax and to making disclaimers. The due date for any extended act cannot be earlier than September 18, 2011 (nine months after December 17, 2010, the date the new law was enacted). 2013 Sunset Provision Under the new law, these new provisions will all sunset in 2013, and the higher tax rates and lower exclusion amounts in place before 2001 will return. In addition, the family-owned busi- ness deduction and the state death tax credit, as well as other provisions repealed in 2001, will come back into effect. MISCELLANEOUS PROVISIONS Dividends of Regulated Investment Companies The exemption from the 30-percent tax, collected through withholding, on regulated investment company (RIC) dividends, designated as either in- terest-related ot short-term capital gain dividends, paid to nonresident aliens or foreign corporations. is extended for two years, through 2011. S Corporation Basis Adjustment for Charitable Donations In general, for charitable contributions of prop- erty, a shareholder's basis in S corporation stock is reduced by the shareholder's pro rata share of the contribution. However, a provision that reduces a shareholder's basis in S corporation stock by the adjusted basis of the contributed property has been extended to property con- tributed after December 31, 2009, and before January 1, 2012. REGULATED INVESTMENT COMPANIES The Regulated Investment Modernization Act updates rules for investments in mutual funds. The updates are designed to simplify the rules that apply to mutual funds and to ensure that small investor groups are treated equally with direct individual investors. The changes include: Capital Loss Carryovers: Capital loss carryover rules applicable to individuals are generally ex- tended to RICs. EFTA01221481 38 HIGHLIGHTS of 2010 Tax Legislation Dividend Distributions: Modified rules for RIC dividend distributions and other pass-through items replace the written notice to shareholders with formal reporting and revise the allocation method for excess distributions. Earnings and Profits: The rules for the taxable income treatment of a RIC's net capital loss also apply for purposes of determining both current and accumulated earnings and profits. Disal- lowed expense deductions related to tax-exempt interest are allowed in calculating current, but not accumulated, earnings and profits. Pass-through of Dividends and Creditr. An upper- tier RIC that is a qualified hind of hinds may pass through exempt-interest dividends and foreign tax credits to its shareholders, without having to meet the 50-percent asset requirement. Loss DOS: For purposes of determining tax- able income, net capital gain, net short-term capital gain, and earnings and profits, a MC can elect to defer qualified late-year losses to the first day of the next tax year. MC Stock Dispositions•. Certain losses on the sale of exchange of RIC stock are allowed even if the shareholder received an exempt-interest dividend. EFTA01221482