The House and Senate have passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, also known as the 2010 Tax Relief Act, and President Obama signed the bill today. Let’s take a brief first look at how the new law will affect all of us.
- All income tax rates will remain the same for the next two years as they have for the previous ten. References to the extension of Bush tax cuts means that tax rates cut in 2001 will remain in effect at least through 2012.
- Individuals earning more than $200,000 or couples earning more than $250,000 will not pay higher tax rates.
- The social security tax rate (referred to as a “payroll tax holiday”) will drop from 6.2% to 4.2% in 2011. However, the Making Work Pay Credit has expired.
- According to the Tax Policy Center, over 99% of those earners in the lowest quintile (up to $17,873 per year) will end up with less take-home pay since the social security rate drop does not save taxpayers as much as the Credit did.
- About half of the earners in the second quintile ($17,873 to $34,896 per year) will also have less take-home pay as well.
- About 85% of those earning more than $34,896 will see increases in take-home pay in 2011.
- The law extends unemployment insurance benefits for 13 months. 2 million people will continue to receive their benefits.
- COMMENT: Obama essentially bargained for the payroll tax holiday and the extension of unemployment insurance to keep most people from having to pay more taxes during this recession.
Alternative Minimum Tax (AMT)
- A “patch” has been re-implemented so that about 21 million people, mostly in the middle class, will not be subject to the AMT for 2010 and 2011.
- You will most likely have the same AMT responsibility as last year.
Estate & Gift Taxes
- Each person’s first $5 million will be exempt from estate taxes. Gifts up to $5 million during one’s lifetime are also exempt from gift taxes. Above that amount, rates will be subject to a maximum 35% rate.
- Approximately 3,600 families will be hit with the estate tax in 2011 & 2012, down from an estimated 5,500 in 2010. Inherited amounts now receive a full step-up in basis, and 2010’s limited carryover amounts expire.
- The estate tax rate is retroactive to January 1, 2010. Representatives of those dying in 2010 may select between the new estate tax rate and the law in place during most of 2010 (no estate tax with capital gain limitations).
- Any unused exemption by one deceased spouse is portable to the second spouse’s estate. The executor of the first spouse must actively elect this option on an estate tax return, even if there is no liability owed.
- STRATEGIES (discuss with your estate planning attorney before implementing):
- If you have over $5 million – while the same rates apply, gifting will still be cheaper than passing assets through the estate. Example: You want to give $6 million to your children. If gifted before your death, you will owe an additional $350,000 in gift tax. If you wait until after your death, the $6.35 million will instead result in $472,500 in estate taxes. See this forbes.com post for another example.
- If you have between $1 million and $5 million – don’t avoid A-B trust planning despite the new higher exemption. Remember that the new rates only apply for two years. While it is unlikely that the 2012 Congress would allow the estate tax exemption to revert back to $1 million with a maximum 55% rate, they will certainly be looking for ways to increase revenues. Avoiding planning could cause you a bigger hit than necessary.
- If you have below $1 million – you probably do not need to worry too much about estate taxes at this time. However, DO NOT ignore estate planning – topics such as insurance ownership, guardianships, digital assets, powers of attorney, etc. are still important and necessary for all adults. If you do, we’ll have to start to put annoying ads all over billboards, radio, TV, our blogs, etc.
- Zero for the remainder of 2010. Unified with estate and gift taxes in 2011 and 2012. The first $5 million of gifts to grandchildren will be exempt from generation-skipping taxes, with a maximum 35% rate above that amount.
- STRATEGIES: A loophole exists here. Through the end of 2010, amounts in a multigenerational generation-skipping trust can be transferred into a new trust for the benefit of the grandchildren only and will be subject to 2010’s 0% generation-skipping tax rates. Check this forbes.com post for further details.
- Tax Relief Enacted (paelderestatefiduciary.blogspot.com)
- Tax Bill Signing Ceremony: McConnell to Show; Pelosi and Boehner to Skip (blogs.wsj.com)
- Obama Signs Bill to Extend Bush Tax Cuts (www.cbsnews.com)