Death and Taxes are Certain, both Addressed in Latest Tax Bill
December, 2010
By
Darin Christensen
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "Tax Relief Act") has been passed. It includes a two-year extension of the 2001 and 2003 tax cuts, a one-year payroll tax cut, and new rules for the gift and estate tax. While the Tax Relief Act is in effect for the next two years, there are many planning opportunities for businesses and individuals. Here are some of the key elements of the recent legislation we think may affect your business and personal finances as we look to the New Year. We hope these help you consider the impact of the two year extension of the capital gains and other income tax cuts, the social security tax reductions and new gift and estate tax rules.
Take advantage of low capital gain and dividend provisions. In 2001 and 2003, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The tax provisions of EGTRRA and JGTRRA were set to sunset at the end of 2010. The Tax Relief Act postpones the sunset for two years, extending all of the 2001 and 2003 tax cuts set to expire on December 31, 2010. Through December 31, 2012, long-term capital gains will continue to be taxed at a maximum rate of 15%, and qualified dividends will be taxed at the same rates as long-term capital gains.
- Think about this: There is no need to accelerate the sale of low basis property, and you have two more years to consider profit taking. If you have a low tax basis asset that you were thinking of selling before tax rates go up, you have two more years to take advantage of the opportunities associated with these historically low capital gains rates.
Take advantage of income tax rate extensions. The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33%, and 35% (instead of moving to 15%, 28%, 31%, 36%, and 39.6%).
- Think about this: This could be an opportunity to invest additional income in a new venture. Also, we have observed that the paradigms for retirement savings are changing as the population ages. Your long term spending needs may be changing too. This is an excellent opportunity to ensure you save enough for a comfortable retirement. For clients whose retirement savings are more than adequate, Roth IRA conversion is going to continue to provide an attractive option for tax free savings for your family.
Take advantage of lower Social Security taxes. Currently, employees pay a 6.2% Social Security tax on all wages earned up to $106,800. Under the Tax Relief Act, the Social Security tax on individual wages is lowered to 4.2% in 2011. This means all employees will pay 4.2% to Social Security instead of 6.2%. The employer share of Social Security taxes will remain unchanged. Self-employed individuals will pay only 10.4% in Social Security taxes rather than 12.4%. An employee earning $70,000 a year would take home an additional $1,400 ($70,000 x .02) as a result of the tax cut. In 2011, Social Security taxes apply to the first $106,800 in wages. Individuals who earn $106,800 or more in wages will pay $2,136 less than without the Tax Relief Act.
- Think about this: Consider saving these additional funds to contribute more to a retirement plan, help you pay the income tax associated with a Roth IRA conversion or contribute more to a Health Savings Account (HSA).
Take advantage of estate and gift tax rules. The federal estate tax is a federal tax imposed on the transfer of the taxable estate at a person's death. EGTRRA had the effect of phasing out the estate and generation-skipping transfer taxes so that they were repealed in 2010. The estate tax was scheduled to return on January 1, 2011 with a $1 million exemption and a 55% tax rate. Under the Tax Relief Act, for a two-year period the estate tax rate is set at 35% and applies only to estates over $5 million. The gift tax exemption is reunified with the estate tax to $5 million. The executor of the estate of a deceased spouse who does not fully use the $5,000,000 exemption may transfer the unused exemption to a surviving spouse. Executors of estates of decedents passing away in 2010 have a choice of using the 2010 rules or the 2011 rules. The Tax Relief Act does not change the state estate tax rules that are currently in place throughout the U.S. and the various exemptions for state estate taxes.
- Think about this: The increased gift and generation-skipping transfer tax exemption is a tremendous opportunity to make historically large gifts, reducing your estate for both federal and state estate tax purposes.
Other provisions. The Tax Relief Act also includes:
- A two-year alternative minimum tax patch retroactive to 2010 through the end of 2011;
- Retroactive reinstatement for 2010 and extension through 2011 of the research and development credit and new markets tax credit;
- Extension of other benefits including the $1,000 child tax credit and its increased refundability, the expanded earned income credit, the higher education tax credit, and the ability to itemize deductions for state and local general sales taxes in lieu of itemized deductions for state and local income taxes.
Expect to hear more about the effects of the Tax Relief Act from your lawyers at Bullivant Houser Bailey in coming weeks. In the meantime, if you are interested in learning how the Tax Relief Act affects you or your business today, contact the Tax Group at Bullivant Houser Bailey.
Circular 230 Compliance: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.