On Friday, December 17th, President Obama signed into law the Reid Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This compromise legislation extends the provisions of two major bills enacting tax cuts for individuals which were set to expire at the end of 2010: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The new federal tax law also extends a number of EGTRRA provisions that were modified in the American Recovery and Reinvestment Act. The following is a brief (and by no means comprehensive) summary of the new legislation:

Reductions in Individual Income Tax Rates

Extension of 10% bracket through 2012. The 10% individual income tax bracket was set to expire at the end of 2010, at which time the lowest individual tax rate would have been raised to 15%. The new law extends the 10% individual income tax bracket through 2012.

Extension of 25%, 28%, 33% and 35% brackets through 2012. The 25%, 28%, 33% and 35% individual income tax brackets were set to expire at the end of 2010, at which time the rates would have become 28%, 31%, 36% and 39.6%, respectively. The new law extends the 25%, 28%, 33% and 35% individual income tax brackets through 2012.

Extension of repeal of itemized deduction limitation through 2012. Taxpayers generally itemize deductions if their total deductions are more than the standard deduction amount for the tax year. Since 1991, there have been limitations on the amount of itemized deductions a taxpayer may claim to the extent the taxpayer’s adjusted gross income (AGI) exceeds a certain amount. The EGTRRA repealed these limitations on itemized deductions for 2010, and the new law extends this repeal through 2012.

Capital Gains and Dividends

Extension of the capital gains and dividend rates. For the past few years, the capital gains and dividend rates for taxpayers below the 25% bracket has been equal to 0%. For taxpayers in the 25% bracket and above, the capital gains and dividend rates has been 15%. These favorable rates were set to expire at the end of 2010, however, the new law extends these capital gains and dividends rates for all taxpayers through 2012.

Estate Taxes

Temporary estate, gift and generation-skipping transfer tax relief. The EGTRRA phased out the estate and generation-skipping transfer (GST) taxes until they were fully repealed in 2010, lowered the gift tax rate to 35%, and increased the gift tax exemption amount to $1 million for 2010. The new law sets the estate and gift tax exemption at $5 million per person and $10 million per couple, and sets a top tax rate of 35% for estate, gift and GST taxes through 2012. The law will be retroactive to January 1, 2010 but allows an election to choose no estate tax and modified carryover basis for estates of decedents dying in 2010. The new law also sets a $5 million GST tax exemption and a 0% GST tax rate for 2010.

Portability of unused exemption. The new law allows the personal representative of a deceased spouse’s estate to transfer any or all of the deceased spouse’s unused exemption to the surviving spouse, effective for estates of decedents dying after December 31, 2010.

Reunification. Before the EGTRRA, estate and gift taxes were unified, meaning an individual’s lifetime exemption could be used for lifetime gifts and/or bequests (paid after death). The EGTRRA decoupled these systems. The new law reunifies the estate and gift taxes effective for gifts made after December 31, 2010.
Individual Income Tax Relief.

Extension of tax-free distributions from individual retirement plans for charitable purposes. The new law extends through 2011 the provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer per taxable year but only if the taxpayer is over age 70 1/2. The new law also allows individuals to make charitable transfers during January, 2011 and treat them as if made during 2010.

Laura J. Petrie