The Great Compromiser: Obama and His Tax CutsPosted December 20th, 2010
Why is this Topic Important to Wealth Managers? Discusses relevant provisions of the “Obama Tax Cuts”. Provides a topical overview of pertinent provisions for wealth managers.
On Friday, President Obama signed into legislation, what is quickly becoming known as the Obama Tax Cuts, which extend tax breaks initially created by the George Bush Administration about a decade ago. For the previous discussions and various versions of this “long and winding road” of the passage of this new tax law – see Tax Deal Reached
The new tax law “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (HR. 4853)“ provides an extension for two years (unless otherwise noted), of generally the following (not all inclusive):
The continuation of the 10, 15, 25, 28, 33, 35-percent regular income tax brackets. Sec 101.
The continuance of the removal of itemized deduction limit and personal exemption phase-out. Sec 101.
Child tax credit extensions along with increased earnings threshold for credit determination. Sec. 101 and 103.
Increases the basic standard deduction for a married couples filing jointly to twice that of the standard deduction for unmarried individuals. Sec 101
Extends certain earned income tax credit provisions including for determination of application of tax credit to income tax liability. Sec 101 and Sec 103.
Extends qualified dividend income taxable at net capital gains rates. Sec 102
Extends the maximum rate of tax on adjusted net capital gains to 15 percent. Sec 102.
Extends Hope and American Opportunity Tax Credit with regards to secondary education. Sec 103.
Alternative Minimum Tax (AMT) exemption amounts for taxable years 2010; $72,450, for married filing jointly and $47,450, for unmarried individuals, and 2011; $74,450, for married filing jointly, and $48,450 for unmarried individuals. Sec 201.
The provision reinstates the estate and generation skipping transfer taxes with exclusion amount of $5 million, with a maximum estate tax rate of 35 percent. Sec 301-304.
For gifts made in 2010, exclusion amount is $1 million, and the gift tax rate is 35 percent, for gifts made December 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35 percent. Sec 301-304.
The generation skipping transfer tax exemption continues in an amount of $5 million. Generation skipping transfer tax rate for transfers made during 2010 is zero percent. The generation skipping transfer 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). Sec 301-304.
Repeals the modified carryover basis rules—now a recipient of property acquired from a decedent will generally receive a “step-up” or fair market value basis. Sec 301-304.
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 provides for a 50 percent first-year additional depreciation deduction for qualified property placed in service after December 31, 2011 and before January 1, 2013. Sec 401.
Starting in 2012, the maximum amount a taxpayer may expense is $125,000 of the cost of qualifying property placed in service for the taxable year. The $125,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $500,000. Sec 402.
Reduces the employee FICA tax by two percentage points for one year (2011 only). Also reduces self-employment taxes tax by two percentage points for taxable years of individuals that begin in 2011. Sec 601.
The Act extends the rules regarding contributions of capital gain real property for conservation/charity purposes for two years for contributions made in taxable years beginning before January 1, 2012. Sec 725.
We provide a link below to the actual Bill (now new law) that you may look at each section listed above after each change. Then, we provide a link to the Congressional explanation of the changes:
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (HR. 4853) Bill: http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853eas2/pdf/BILLS-111hr4853eas2.pdf Last Accessed 12/19/2010.
Joint Committee on Taxation. Technical Explanation of the Revenue Provisions Contained in the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” Scheduled For Consideration By The United States Senate. JCX-55-10. December 10, 2010. Accessible through: http://www.jct.gov/publications.html?func=startdown&id=3716. Last Accessed 12/19/2010.
Tomorrow’s blog will discuss certain provisions of the tax cuts in more detail.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.