Updated Year End Tax Planning

The first year end planning memo as you will see below focused on income acceleration and deduction deferral and was written during an uncertain time in our tax legislative history with Congress in the lame duck session mulling over our tax fate. So please disregard that memo in large part as the tax Act that extends the Bush era tax cuts has passed and leaves many tax rates and incentives unchanged.

With the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the Act) on December 17, 2010 taxpayers have maintained the Bush era tax cuts and are provided various individual and business tax incentives. It should be noted that the Act will cost over $800 billion and there are no revenue offsets which was made possible by designating each provision of the Act as an "emergency requirement", hence bypassing the PAYGO mandate.

The major individual taxpayer incentives changed or extended in the Act include:

1. Extension for two year through 2012 of the current individual tax rates. The rate table is included below for married filing jointly and single filers.

2010 Schedule X - Single

Taxable income is over -			But not over -	The tax is:	Of the amount over -
$0			$8,375	$0 + 10%	$0
8,375			34,000	837.50 + 15%	8,375
34,000			82,400	4,681.25 + 25%	34,000
82,400			171,850	16,781.25 + 28%	82,400
171,850			373,650	41,827.25 + 33%	171,850
373,650			-	108,421.25 + 35%	373,650

2010 Schedule Y-1 - Married Filing Jointly or Qualifying Widow(er)

Taxable income is over -	But not over -	The tax is:	Of the amount over -
$0	$16,750	$0 + 10%	$0
16,750	68,000	1,675.00 + 15%	16,750
68,000	137,300	9,362.50 + 25%	68,000
137,300	209,250	26,687.50 + 28%	137,300
209,250	373,650	46,833.50 + 33%	209,250
373,650	-	101,085.50 + 35%	373,650

 

Note that these rates will revert back to the pre-Bush tax cut rates of 15, 28, 31, 36, 39.6 in 2013.

1. Extension of a higher alternative minimum tax exemption and allowance of non refundable personal credits against the AMT for 2010 and 2011. The Act increases AMT exemption amounts to 47,450 for unmarried filers from 33,750 and to 72,450 for married filers from 45,000 for 2010. For 2011 the AMT "patch" will be 48,450 for single filers and 74,450 for married filers.
2. The top income tax rates on income from qualified dividends and long term capital gains will hold at 15%. For those with dividends and long term capital gains taxed in the lowest two tax brackets, the tax rate will remain at zero percent. Tax rates on investment income will return to their pre-Bush tax cut rates in 2013 of 10 and 20 percent on long term capital gains and dividends will be taxed as ordinary taxable income with a top rate of 39.6%.
3. A one year reduction in the employee share of the Old Age, Survivors, and Disability Insurance (Social Security) tax from 6.2% to 4.2%. This provision effectively replaces the Making Work Pay tax credit in that it is intended to encourage employment and place cash in the hands of likely consumers. The relief applies to all individuals subject to Social Security tax without regard to any limit on the amount of wages or other income they received. Self-employed individuals can reflect the reduced rates in their estimated tax payments. Self employed individuals will continue to deduct one-half of the SE tax that would have been paid if the holiday had not been enacted.
4. Act Extends through 2012 the child tax credit modifications including the increase to $1,000, ability to claim against AMT and the refundability of the credit.
5. The marriage penalty relief was extended through 2012 with the standard deduction for joint filers double that of a single filer. The 15% bracket was doubled for joint filers as well to provide relief.
6. The Act extends for two years the repeal of two provisions that effectively increase marginal tax rates for higher-income individuals: the personal exemption phase out and the itemized deduction limitation.
7. The extended individual incentives include the itemized deduction for state and local general sales tax, tax free distributions from individual retirement plans for charitable purposes, and the above the line deduction for qualified tuition and related expenses.
8. The Act extends through 2012 prior increases of family tax benefits including:
   1. The increase in adoption and credit and income exclusion for employer-assistance programs to $10,000, expansion to cover non-special needs adoptions, and increase in the beginning point of the phase-out limitation to $150,000.
   2. The employer provided child care tax credit equal to 25 percent of qualified expenses for employee child care and 10 percent of qualified expenses for child care resource and referral services. The maximum credit allowed is $150,000 per year.
   3. The increases in the percentage rate, maximum limit and phase down of the dependent care tax credit.
   4. The earned income tax credit.
9. The Act extends through 2012 various education tax incentives including:
   1. The $5,250 annual employee exclusion for employer provided educational assistance, which was subject to the EGTRRA's sunset provision, and its expansion to include graduate level courses.
   2. The expansion of the student loan interest deduction beyond 60 months and increased income phase out range
   3. The increased Coverdell education savings account contribution limit (from $500 to $2,000)
   4. The Act also extended for two years the modifications that were made by the ARRA to the former Hope Scholarship Credit, now known as the American Opportunity Tax Credit.

The major business incentives changed or extended in the Act include:

1. Extension of 50% bonus deprecation and small business expensing through 2012 and a 100 percent expensing allowance for property placed in service after September 8, 2010, through 2011. In other words, from Sept 8, 2010 to December 31, 2011 there will be allowed 100% expensing of qualified property placed in service. For 2012 the amount to be expensed will revert to 50% for qualified property placed in service.
   1. Qualified property includes:
      1. Property with a MACRS recovery period of 20 years or less
      2. Certain computer software
      3. Water utility property
      4. Qualified leasehold improvement property
   The Act provides for another temporary election to claim a refundable credit in lieu of bonus depreciation for property placed in service in 2011 and 2012. This election allows corporations to effectively monetize a portion of their AMT credits (if originally generated in taxable years beginning before 2006) in lieu of claiming bonus depreciation. Note corporations will not be able to monetize old R&E credits, but will be able only to elect o monetize old AMT credits in lieu of claiming bonus depreciation for their round 2 extension property.
   Remember that many states do not conform to federal law and that for bonus depreciation you should always check with the laws in the states you are conducting business.
2. The 179 small business expensing limitation for tax years 2010 and 2011 will be $500,000. The limitation is reduced for those years if the cost of the section 179 property exceeds $2 million. The new Act provides an additional year, 2012, of increased section 179 expensing. The limitation is raised to $125,000, and the reduction begins at $500,000. Those amounts will return to $25,000 and $200,000 after 2012.
3. The extended business tax incentives include, the R&D tax credit, the New Markets Tax Credit, 15 year straight line cost recovery for qualified leasehold improvements, the exception for active financing income under subpart F, and look through treatment of payments between related controlled foreign corporations.
4. The Act extended several energy tax credits and incentives such as the section 1603 credit providing grants for specified energy property in lieu of production or investment tax credits, ethanol credits, the suspension on taxable income limit for purposes of depleting a marginal oil well or gas well, credits for renewable diesel and biodiesel, the refined coal credit, the credit for energy efficient improvements to existing homes, the credit for the manufacture of energy efficient appliances and the 30 percent investment tax credit for alternative vehicle refueling property. It does not extend the 30 percent credit for qualifying advanced energy projects, however.
   
    

The major estate tax changes or extenders provided for in the Act include:

    Estate Taxes

1. Under the Act, the estate tax will have an exemption of $5 million per spouse and a top rate of 35 percent retroactive from the beginning of 2010 through 2012. The exemption will be indexed for inflation, beginning in 2012. The carryover basis rules that have applied during 2010 will be retroactively repealed; instead, assets passed on to estate beneficiaries generally will qualify for a step up in basis to fair market value.
2. The Act also allows portability of a decedent's unused estate exemption to the surviving spouse. Thus, beginning after 2010, a surviving spouse could use his or her own base exemption of $5 million plus the unused exemption of his or her most recent deceased spouse. The decedent's unused exemption would not be available to the surviving spouse on subsequent gift tax returns and the survivor's estate tax return unless the executor of the deceased spouse's estate made an election to grant it and computes the amount to which the surviving spouse is entitled. If the executor failed to make a timely election, there would be no relief allowed under Treasury reg. section 9100 for a missed election
3. For 2010, the Act allows the estates of decedents dying on or after January 1, 2010, and before January 1, 2011, to elect out of the Act's estate tax regime and instead apply former 2010 law – no estate tax and modified carryover basis rules. The election, once made, would be revocable only with the consent of the Secretary of Treasury.
4. The Act also extends through 2012 several modifications enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001. These include:
   • Expanding the availability of installment payments for estates with interests in a qualified lending and finance business;
   • Clarifying installment payment provisions, requiring that only the stock of the holding companies not that of operating subsidiaries, must be not readily tradable. (Estates taking advantage of these two provisions would have to make the required payments over five years rather than 15);
   • Expanding the availability of estate tax installment payments by broadening the definition of an interest in closely held businesses; and
   • Allowing a deduction of estate taxes paid to any state or the District of Columbia for decedents dying after December 31, 2009.
5. The Act grants extensions of time for the filing of a tax return for certain estates, making tax payments, or making a disclaimer with respect to an interest of property passing by reason of the decedent's death. In the case of an estate for a decedent dying after December 31, 2009, and before the Act's date of enactment, the due date for these compliance requirements will be the date nine months after the date of enactment.
   Gift Taxes
6. For the next two years, the gift tax will remain at 35 percent and the exemption for the estate and gift taxes will be reunified at $5 million after December 31, 2010. With the increase in the gift tax exemption to $5 million, the Act will permit an additional $4 million per donor to be transferred without gift tax liability. Prior gifts made in 2010 will not be affected by the Act, so the gift tax exemption remains at $1 million and the highest gift tax rate stays at 35 percent. However, the Act does clarify that the credit permitted with respect to prior taxable gifts in order to determine current-year tax liability is determined by the rate structure in effect on the date at which the credit is being determined, not the rate structure in effect when the prior gift was made. This rule is effective for transfers made after December 31, 2009.
   Generation Skipping Tax
7. The Act reinstates the GST tax effective for decedents dying and transfers made after December 31, 2009. The GST exemption in 2011 and 2012 will be $5 million – equal to the exclusion used for estate tax purposes. The GST tax rate for transfers made after 2010 is equal to the highest estate and gift tax rate in effect for such year – 35 percent for 2011 and 2012. In 2010, the GST tax will apply, but the tax rate for transfers made in 2010 will be zero percent. The GST exemption will be $5 million.
8. The Act also extends the following GST modifications enacted as part of EGTRRA:
   • The GST tax exemption will be allocated automatically to transfers to GST trusts made during life that are "indirect skips." An individual making direct or certain indirect skips may elect out of the allocation rules.

• Under certain conditions, the GST tax exemption can be allocated retroactively.

• Those inadvertently failing to make timely elections to allocate the GST exemption will have the opportunity to seek relief from Treasury.

• A "qualified severance" of a trust into two or more trusts, under the governing instrument or local law, will be respected for GST purposes.

• The value of property to be used for determining the inclusion ratio is the property's finally determined gift tax value or estate tax value.

• Substantial compliance with the statutory and regulatory requirements for allocating the GST exemption will suffice to establish that the GST exemption is allocated to a particular transfer or trust.

1. For generation-skipping transfers made from January 1, 2010, through the date of enactment, the due date for filing a return, including any elections required to be made on the return, will be nine months after the Act's date of enactment.