Publications

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President Barack Obama has signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

The Act, passed by the House of Representatives in a midnight vote late last week, includes an extension through 2012 of the reduced tax rates enacted in 2001 and 2003, extension of unemployment benefits, a reduction in the employee’s share of the Social Security tax for one year, and modification of the estate tax system.

This article briefly summarizes revenue provisions of the Act. Read the complete Joint Committee on Taxation’s Technical Explanation of the Act here, and the Act here.

It is also important to observe what is not included in the Act. Noteworthy omissions include:

• The Act does not include a provision for the taxation of carried interest (i.e, partners’ sweat equity), which was heavily debated over the summer.
• The Making Work Pay tax credit is not renewed (this is replaced by the cut in the employee’s Social Security tax).
• A number of incentives will be allowed to expire, such as those for infrastructure-related bonds, tax-exempt eligibility loans and bank investment in tax-exempt bonds from small issuers. Certain low-income housing incentives will also be allowed to expire.
• President Obama’s revenue raising foreign tax proposals, such as limiting the deferral of foreign income, creating a “pooled” approach to foreign tax credit, curbing the abusive shifting of intangibles out of the United States; and limiting abuses related to foreign reinsurance are not part of the Act.
• Renewable energy credits that are not being extended include the credit for alternative fuel motor vehicles and the credit for facilities that produce steel industry fuel.
• The previously proposed restrictions on grantor retained annuity trusts, which would have required a minimum term of 10 years, decreasing annuity payments, and a remainder value greater than zero, are not in the Act.

Extension of tax relief

The temporary extension of tax relief in the Act includes the following:

• Extension of the 10, 15, 25, 28, 33 and 35 percent individual income tax rates through 2012 (in lieu of 15, 28, 31, 36, and 39.6 percent).
• Suspension of the overall limitation on itemized deductions applicable in 2010, and suspension of the phase-out of the personal exemption applicable in 2010, will be extended through 2012.
• The increased child tax credit is extended through 2012.
• Marriage penalty relief obtained by extending the 15 percent tax bracket and the increased standard deduction for married couples is extended through 2012.
• Tax benefits for education are extended through 2012, including exclusion from income of the NHSC and Armed Forces scholarships (even though services are provided by the student), the expanded income exclusion for employer-provided education assistance, the expanded student loan interest deduction and the higher and expanded limits for Coverdell education savings accounts. Tax-exempt private-activity bonds for public school facilities can be issued for an additional 2 years, through 2012. The American Opportunity Tax Credit, allowing for the deduction of tuition for taxpayers below certain income limits, is extended through 2012.
  • The adoption credit, exclusion of employer-provided adoption assistance, the employer-provided child care tax credit and the dependent care tax credit are extended through 2012.
• The reduced tax rates for capital gains and dividends are extended through 2012.
• The extended earned income tax credit for families with 3 or more children, and the higher phase-out thresholds are extended into 2011 and 2012.
• The alternative minimum tax exemption amounts are increased for 2010 and 2011.

Estate and other transfer taxes

Most of the Act's provisions affecting transfer tax are effective beginning in 2011, but some are also applicable to transfers made in 2010. The new provisions include:

• The estate and gift tax exclusion/exemption amounts and rates are reunified and set at $5 million and a maximum rate of 35 percent, beginning in 2011. The generation-skipping transfer tax exemption will also be $5 million, with a rate of 35 percent. The $5 million amount is indexed for inflation from 2010 beginning in 2012.
• These exemption amounts and rates also apply to transfers made in 2010, except that the lifetime exemption for gifts remains at $1 million through 2010; it increases to $5 million for gifts made after December 31, 2010.
• The Act "repeals the repeal" of the estate tax for estates of decedents who died in 2010, which estates are subject to estate tax under the Act at the 35 percent rate with an exclusion amount of $5 million. The basis of the assets of such estates is their fair market value as of date-of-death, not the modified carryover basis of the decedent. Thus, the default for 2010 deaths is that the estate tax and date-of-death basis rules apply.
• Executors of 2010 estates may elect to opt back into prior 2010 law, however; that is, no estate tax, but carryover basis (increased by specified amounts).
• Extensions of time to file returns and pay estate and GST tax, and to make disclaimers, are granted with respect to transfers made prior to enactment, generally to no earlier than nine months following the date of enactment.
• For deaths in 2011 and thereafter, a surviving spouse may add her last deceased spouse's unused exclusion amount to her own exclusion amount, provided the deceased spouse's executor has elected accordingly on a timely filed estate tax return and the first spouse's death occurred after December 31, 2010. A surviving spouse may also use a predeceased spouse's unused gift tax exemption (but not GST exemption).
• There will be no GST tax on outright gifts to grandchildren made in 2010, nor on certain gifts to trusts for grandchildren made in 2010, even when distributions are made from the trusts to the grandchildren in subsequent years. The GST rules in effect since 2001 (such as automatic allocation to indirect skips) apply to transfers made in 2010.
• These provisions sunset at the end of 2012.

Investment incentives

Extended investment incentives include the following:

• The bonus depreciation provision, which permits a first-year deduction equal to 50 percent of the adjusted basis of qualified property placed in service in 2008, 2009 and 2010, is extended and increased to 100 percent for qualified property placed in service after September 8, 2010 and before January 1, 2012. The 50 percent bonus depreciation applies to property placed in service after December 31, 2011 and before January 1, 2013. (Longer periods apply to certain longer-lived and transportation property.)
• Small business expensing, which permits a taxpayer to deduct the cost of certain qualified property (rather than recover such costs through depreciation), is set at a limit of $125,000 for 2012 and $25,000 for 2013 and later (the limit is $500,000 for 2010 and 2011). The deduction limits are phased-out if the total cost of qualifying property placed in service during the year exceeds certain limits.

Employee payroll tax reduction

The employee portion of the Social Security payroll tax is cut from 6.2 percent of covered wages to 4.2 percent of covered wages for 2011.

Temporary extension of expiring energy provisions

Temporary extension of energy-related tax incentives include the following:

• The Act extends for one year, until December 31, 2011, the placed-in-service date for specified energy property, the construction of which began before 2009, and the date for beginning construction for specified energy property which is placed in service after 2010 (extended to 2011 under the Act), but prior to the termination date for the particular category of property. In the case of property placed in service after 2011, only costs incurred after December 31, 2008 will be considered in determining the amount of the grant. The termination dates under existing law, which for example is December 31, 2012 in the case of wind property and December 31, 2016 in the case of solar property, are not extended by the Act. The Act also extends the application date for property placed in service after December 31, 2011 one year to September 30, 2012.
• The $1.00 per gallon credit for use or sale of biodiesel and renewable diesel and for the use of biodiesel and renewable diesel in producing mixtures of each fuel, is extended two years through December 31, 2011.
• The $1.00 per gallon excise tax credits for biodiesel used in producing biodiesel mixtures is extended two years to December 31, 2011.
• The $0.50 per gallon excise tax credits for use or sale of an "alternative fuel" as fuel in a motor vehicle, a motorboat, or in aviation, or for producing an alternative fuel mixture for sale or use in the taxpayer's trade or business is extended two years to December 31, 2011.
• The Act also directs the Secretary of the Treasury to issue guidance providing for submission of claims for allowance and refund or payment of the excise tax credits for periods during 2010, during which these credits had expired.
• Additional renewable energy and energy efficiency provisions include:
  • A two-year extension of the placed-in-service date for facilities producing refined coal to December 31, 2011.
  • A two-year extension of the suspension of the income limitation on percentage depletion for oil and gas produce from marginal wells to permit an allowance for percentage depletion determined for any taxable year beginning prior to January 1, 2012.
  • A two-year extension of the special rule on the recognition of gain from any qualifying transmission transaction by a qualified electric utility to apply to dispositions occurring prior to January 1, 2012.
  • A one-year extension of the placed in service date for alternative fuel vehicle refueling property, other than property relating to hydrogen, to December 31, 2011.
  • A two-year extension of the New Energy Efficient Home Credit to qualifying residences acquired no later than December 31, 2011.
  • A one-year extension, through December 31, 2011, and revision of the qualification criteria Energy Efficient Applicant Credit for dishwashers, clothes washers and refrigerators manufactured during 2011, as well as making modifications to the limitation provisions applicable to this credit.
  • Extension of the placed-in-service date for the credit for non-business energy property for one year, to December 31, 2011, implementation of pre-American Recovery and Reinvestment Act limitations and modification of qualification standards for certain property.

Temporary extension of expiring provisions for individuals

Tax relief provisions extended for individuals include the following:

• The above-the-line deduction for school supplies (up to $250) purchased by teachers is extended into 2010 and 2011.
• The election for individuals to deduct state and local sales tax rather than state and local income tax is extended into 2010 and 2011.
• The increased contribution base limitation for qualified conservation contributions of capital gain real property (50 percent of the contribution base rather than 30 percent) is extended into 2010 and 2011.
• The above-the-line deduction for qualified tuition expenses for individuals below certain income levels is extended into 2010 and 2011.
• The income exclusion for a qualified charitable distribution from an IRA, of up to $100,000 per taxpayer, is extended into 2010 and 2011. Further, a qualified charitable distribution from an IRA in made January, 2011 can be treated as made in 2010.
• The increased income exclusion for qualified transportation fringe benefits is extended into 2011.

Temporary extension of expiring provisions for business

Tax relief provisions extended for business include the following:

• Extension of certain tax credits. The hire date for the Work Opportunity Tax Credit is extended four months, from August 31, 2011 to December 31, 2011. In addition, the following tax credits are extended into 2010 and 2011:
  • Research Credit
  • New Markets Tax Credit (also extends period for carryover of unused credit by two years to 2016)
  • Railroad Track Maintenance Credit
  • Mine Rescue Team Training Credit
  • Employer Credit for differential pay to active duty members of the uniformed services
• The following accelerated recovery periods are extended into the years 2010 and 2011:
  • Fifteen-year recovery period for certain qualified leasehold improvements, restaurant property and retail improvements
  • Seven-year recovery period for motorsports entertainment complexes
  • Accelerated depreciation schedules for business property on Indian reservations.
• The following charitable contribution provisions are extended into the years 2010 and 2011:
  • Enhanced deduction provisions for contributions of certain food inventory, book inventory and computer inventory
  • Favorable basis adjustment rule for donations by S corporations
• The following favorable expensing provisions are extended into the years 2010 and 2011:
  • Expensing of certain mine safety equipment
  • Expensing of certain film and television production costs
  • Expensing of certain environmental remediation costs
• The package of tax incentives available for the following geographic zones are extended for the years 2010 and 2011:
  • Empowerment Zones
  • The District of Columbia Enterprise Zone
• The following provisions were extended one year to include 2011:
  • The Qualified Zone Academy Bond Program
  • The deduction for certain private mortgage insurance premiums
  • The 100 percent gain exclusion and exception from the AMT rules applicable to “Qualified Small Business Stock”

Foreign tax relief

Tax relief provisions extended for foreign persons include the following:

• The bill extends, from taxable years starting before December 31, 2010 to taxable years starting before January 1, 2012, the exemption from US gross basis and withholding tax of “interest related dividends” and “short term capital gain dividends” received by a foreign person from a regulated investment company (RIC).
• The bill extends the inclusion of a RIC within the definition of a “qualified investment entity” from December 31, 2009 through December 31, 2011. Consequently, distributions prior to December 31, 2011 attributable to gain from a disposition of US real property interests by certain RICs to a nonresident alien individual, a foreign corporation or other qualified investment entity will be treated as gain recognized by such persons from the disposition of US real property interest and will be subject to the FIRPTA notice and withholding requirements. However, RICs that made such distributions after December 31, 2009 but before the enactment of the bill will not be liable.
• The bill extends for two years, from taxable years starting before January 1, 2010 to taxable years starting before January 1, 2012, the “active financing income” exceptions from foreign personal holding company income, foreign base company services income, and insurance income for purposes of Subpart F income.
• The bill extends for two years, from taxable years starting before January 1, 2010 to taxable years starting before January 1, 2012, the look-through treatment of payments between related controlled foreign corporations. Under the “look-thru rule,” certain dividends, interest, rents, and royalties received or accrued by one CFC from a related CFC are not treated as foreign personal holding company income.

Temporary disaster relief provisions

Extended disaster relief provisions include the following:

• Authority to issue private-activity New York Liberty Zone bonds is extended into 2010 and 2011.
• The increased rehabilitation credit for the Gulf Opportunity zone is extended into 2010 and 2011.
• The increased ceiling for low-income housing credit for buildings in the Gulf Opportunity Zone is extended to buildings placed in service by December 31, 2011.
• Authority to issue Gulf Opportunity Zone Bonds is extended into 2011.
• The bonus depreciation for Gulf Opportunity Zone extension property, which permits a first-year deduction equal to 50 percent of the adjusted basis of qualified property, is extended to property placed in service by December 31, 2011.

For more information, please contact:

Bruce Wein

Lisa Merrill