On December 17, 2010, President Obama signed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” A product of a compromise forged primarily by President Obama and a bipartisan group of Senators, the Act temporarily extends a wide variety of tax rate cuts and tax benefits for individuals and corporations and contains no revenue offsets.
Summary of Provisions
The broad elements of the Act, discussed in more detail below, are as follows:
- Temporary extension through 2012 of the “Bush-era” individual tax rate cuts, which include rate relief for ordinary income, capital gains and dividends;
- Temporary extension through 2012 of certain other “Bush-era” individual tax relief;
- Temporary extension through 2012 of certain “Obama-era” individual tax relief enacted in 2009;
- Alternative Minimum Tax (AMT) relief for 2010 and 2011;
- Temporary Estate and Gift Tax Relief through 2012;
- Temporary extension of certain investment incentives through 2012;
- Temporary extension for two years, through 2011, of a wide variety of provisions that mostly expired December 31, 2009;
- Temporary payroll tax rate reduction for 2011 of two percent on the employee portion of the Social Security tax; and
- Temporary extension of unemployment insurance through 2011.
Temporary Extension Through 2012 of the “Bush-era” Individual Tax Rate Cuts
The Act extends for two years, through 2012, all the individual rates currently in force for 2010, including:
- The six ordinary income tax rate brackets of 10, 15, 25, 28, 33 and 35 percent;
- The capital gains and dividend rates of 15 percent (zero percent for taxpayers generally in the 10 and 15 percent brackets); and
- The temporary repeal of the overall limitation on itemized deductions and the personal exemption phaseout (the so-called “PEP and Pease” provisions).
Temporary Extension Through 2012 of Certain “Bush-era” Individual Tax Relief
The Act extends for two years, through 2012, a long list of certain individual tax benefit provisions in force for 2010, the most significant of which are:
- The child tax credit against regular tax and AMT of $1,000 per child;
- The increase in the basic standard deduction and the 15-percent regular rate bracket for a married couple to twice the size for an unmarried individual filing a single return (so-called “marriage penalty relief”);
- The taxpayer-favorable modification and simplification of the earned income credit (some of which was enacted in 2009); and
- Certain education tax relief provisions.
Temporary Extension Through 2012 of Certain “Obama-era” Individual Tax Relief Enacted in 2009
The Act extends for two years, through 2012, certain individual tax relief provisions enacted in 2009, including:
- The American opportunity tax credit (relating to education); and
- The reduction of the earnings threshold for the refundable portion of the child tax credit.
Alternative Minimum Tax (AMT) Relief for 2010 and 2011
The Act increases the exemption amounts for the individual AMT for both 2010 and 2011. The exemption amounts for 2010 are (1) $72,450 in the case of married individuals filing a joint return and surviving spouses; (2) $47,450 in the case of other unmarried individuals; and (3) $36,225 in the case of married individuals filing separate returns. The exemption amounts for 2011 are (1) $74,450, in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of other unmarried individuals; and (3) $37,225 in the case of married individuals filing separate returns.
In addition, the Act extends for two years, through 2011, the allowance of nonrefundable personal credits against AMT.
Temporary Estate and Gift Tax Relief Through 2012
The estate tax and generation skipping transfers (GST) taxes which had expired at the end of 2009 (for one year) have been reinstated retroactively for all of 2010. The exclusion amounts for estate, gift and GST taxes have been raised to $5 million (but remains $1 million in 2010 for gift taxes only). For all three taxes the rate will be 35 percent (except for GST taxes which will be 0 percent in 2010 only). The estate of a decedent who died in 2010 may elect to apply the Internal Revenue Code as if these new provisions of the Act relating to the estate tax had not been enacted. This means no estate tax but only a limited step up in tax basis for inherited assets. In addition, a surviving spouse may utilize the deceased spouse’s unused estate tax exclusion amount. Absent further Congressional action, these relief provisions expire after December 31, 2012.
Temporary Extension of Investment Incentives (Bonus Depreciation) Through 2012
Under the law in force prior to the Act, including the extension provisions of the Small Business Jobs Act of 2010, Pub. L. No. 111-240 (Sept. 27, 2010) an additional first-year depreciation deduction is allowed equal to 50 percent of the adjusted basis of qualified property placed in service during 2008, 2009 and 2010. The Act extends and expands the additional first-year depreciation to equal 100 percent of the cost of qualified property placed in service after September 8, 2010 and before January 1, 2012, and 50 percent of the cost of qualified property placed in service in 2012.
Temporary Extension for Two Years, Through 2011, of a Wide Variety of Provisions that Mostly Expired December 31, 2009
The Act extends for two years—for 2010 and 2011—a wide variety of provisions, most of which had been repeatedly extended annually for several years. These provisions include:
- Credits and other benefits for business, including:
- Research and experimentation credit;
- New markets tax credit;
- Subpart F active financing exception;
- Subpart F lookthrough for related controlled foreign corporations (§ 954(c)(6));
- Special treatment of dividends from regulated investment companies;
- Special rules for qualified small business stock;
- A number of energy provisions, such as biodiesel and renewable diesel incentives, income tax credits for alcohol fuels and excise tax credits for alcohol fuel mixtures and cash grants in lieu of investment credits for specified energy property (extended one year through 2011);
- Certain individual tax relief, such as deductions of State and local general sales taxes and qualified tuition; and
- Certain temporary disaster relief provisions for New York and GO Zone.