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Tax Cuts and Unemployment Benefits Extended

The House of Representatives passed the Senate version of the tax bill late on December 16, 2010, without amendment, by a vote of 277-148. The "Unemployment Insurance Reauthorization and Job Creation Act of 2010", HR 4853, postpones the sunset of the 2001 and 2003 tax cuts, reduces the estate tax, extends a large number of expired provisions, and extends unemployment benefits. The President signed the bill on December 17, 2010.

 
In addition to extending unemployment benefits and reducing social security taxes on individuals by cutting their FICA contribution from 6.2% to 4.2% on the first $106,800 of wages in 2011, the bill resolves four of the five tax issues that needed to be addressed during the Congressional “lame duck” session: the estate tax, expiring tax cuts, expired tax provisions, and an alternative minimum tax (AMT) patch. The bill does not address the expanded Form 1099 reporting requirements.

Estate Tax

HR 4853 reinstates the estate tax, with a tax rate of 35% and a tax exemption of $5 million (adjusted for inflation after 2011), and reunifies the gift and estate tax credit at an amount equivalent to $5 million for gifts made after 2010. The bill makes the exemption “portable” thus allowing married couples dying after 2010 to pass up to $10 million either during their lifetime or at death.
 
For the estates of decedents dying in 2010, an election will be available to either be subject to the reinstated estate tax at the $5 million level and a full step up in basis or no estate tax subject to the modified carryover basis rules. Estates of decedents dying in 2010 would be given an extension to file an estate tax return until nine months after the date of enactment of HR 4853.
 
The bill reinstates the generation-skipping transfer (GST) tax with a tax rate of zero for transfers made in 2010. The due date for filing a return would be extended to nine months after the date of enactment of HR 4853. The GST after 2010 would be 35% above $5 million in transfers.

Individual Tax Cuts Extended

The bill postpones the scheduled sunset of the lower tax rates introduced in 2001 by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, PL 107-16); those rates will now continue through 2012. The bill also continues the 15% tax rate on dividend and the lower long term capital gains tax rates introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (PL 108-27) and it continues to allow itemized deductions and the personal exemptions, without phase outs, for two years. 

Bonus Depreciation and Section 179 Expensing

The bill allows taxpayers to deduct 100% of the cost of new business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property).

Extension of Expired Provisions

A variety of temporary tax provisions, often referred to as “extenders,” expired at the end of 2009; more are scheduled to expire at the end of 2010. These expired provisions include tax credits, deductions and various tax incentives. The bill also extends a large number of expired or expiring provisions for two years, including: 

• The increased standard deduction for married taxpayers filing jointly
• The $1,000 child tax credit amount
• The expanded earned income credit
• The $3,000 amount for the child and dependent care credit
• The American opportunity tax creditThe temporary 100% exclusion of gain from the sale of certain small business stock under IRC § 1202, enacted by the Small Business Jobs Act of 2010

Tax Credits

Some of tax credits that would be extended through 2011 by the bill include: 

•  IRC § 25C credit for nonbusiness energy property (which would also be returned to the limitations and standards applicable before amendment by the American Recovery and Reinvestment Act of 2009, PL 111-5)
• IRC § 41 research and development credit
• IRC § 45D new markets tax credit
• IRC § 45L new energy-efficient home credit
• IRC § 45M energy-efficient appliance credit
• IRC § 51 work opportunity credit.

Deductions

The following expired and expiring temporary deductions would also be extended through 2011 by the bill: 

• IRC § 62(a)(2)(D) deduction for elementary and secondary school teachers
• IRC § 163(h)(3)(E) treatment of mortgage insurance premiums as interest
• IRC § 164 state and local sales tax deduction
• IRC § 168(e)(3)(E) 15-year straight-line cost recovery for qualified leasehold improvements and for qualified restaurant improvements
• IRC § 170(b)(1)(E) contributions of capital gain real property made for conservation purposes
• IRC § 170(e)(3)(C) enhanced deduction for contributions of food inventory
• IRC § 170(e)(3)(D) enhanced deduction for contributions of book inventory to public schools
• IRC § 170(e)(6) enhanced deduction for corporate contributions of computer equipment for educational purposes
• IRC § 198(h) expensing of environmental remediation costs
• IRC § 199(d)(8) deduction for income attributable to domestic production activities in Puerto Rico
• IRC § 222 deduction for tuition and related expenses

Other Extended Provisions

Other expired and expiring provisions that would be extended through 2011 by the bill include: 

• IRC § 132 parity for exclusion from income for employer-provided mass transit passes and parking benefits
• IRC § 168(n) expensing and special depreciation allowance for qualified disaster assistance property (extended through 2012)
• IRC § 408(d)(8) allowance for $100,000 of tax-free distributions from IRA for charitable purposes
• IRC § 512(b)(13) special rules for certain amounts received by tax-exempt organizations from controlled entities
• IRC § 954(c) look-through treatment of payments between related controlled foreign corporations
• IRC § 1367(a) basis adjustment to stock of S corporations making charitable contributions of property
• IRC § 1391 empowerment zone incentives

Provisions Not Extended

A few expired provisions that were contained in earlier proposed extenders legislation but that do not appear in HR 4853 include: 

• IRC § 30B credit for alternative motor vehicle credit for advanced lean burn technology motor vehicles, qualified hybrid motor vehicles, and qualified alternative fuel vehicles
• IRC § 165(h) deduction for personal casualty losses in federally declared disasters;
• IRC § 172(j) carryback of net operating losses attributable to federally declared disasters
• IRC § 1400E renewal community tax incentives

AMT Patch

The bill includes an Alternative Minimum Tax (AMT) patch for 2010 and 2011. For 2010, the AMT exemption amounts would be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. For 2011, the amounts would be $48,450 and $74,450, respectively.

The bill extends the ability to use nonrefundable personal credits to offset AMT (under IRC § 26(a)) and the election to accelerate AMT credits in lieu of bonus depreciation, except for property manufactured, constructed or produced during 2010.

For more information, contact Michael Calahan at 312-980-2996, Brian Whitlock at 312-980-2941, or your Blackman Kallick representative.

Posted on December 17, 2010

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.