2010 Significant Tax Law Changes

March 12, 2011

HIRE Act◦ Hiring Incentives to Restore Employment Act of

2010 enacted March 18, 2010 2010 Jobs Act

◦ Small Business Jobs Act of 2010 enacted September 27, 2010

2010 Tax Relief Act◦ Tax Relief, Unemployment Insurance

Reauthorization and Job Creation Act of 2010 enacted December 17, 2010

Major Tax Legislation

Individual Income Tax Rates Itemized Deductions and Personal

Exemptions AMT “Patch” Payroll Tax Cut Additional Medicare Tax

◦ On wages◦ On unearned income

Extension of Tax Breaks

Individual Income Tax Topics

Current tax rates are extended through 2012

Retains 10% bracket for lowest income Retains 15% maximum for long-term capital

gain (would have increased to 20%) Retains 15% maximum for qualified

dividends (would have increased to 39.6%) Retains 35% maximum for ordinary income

(would have increased to 39.6%) Brackets will continue to be indexed for

inflation

Individual Income Tax Rates

Prior Law:◦ Itemized deductions reduced for high income

taxpayers due to “phase-out” beginning in 2011◦ Personal exemptions reduced for high income

taxpayers due to “phase-out” beginning in 2011 2010 Tax Relief Act:

◦ Phase-out repealed for two more years◦ Itemized deductions and personal exemptions are

fully deductible for 2011 or 2012

Itemized Deductions and Personal Exemptions

AMT exemption for couples:◦ $72,450 in 2010◦ $74,250 in 2011◦ Was scheduled to fall to $45,000

AMT exemption for singles:◦ $47,450 in 2010◦ $48,450 in 2011◦ Was scheduled to fall to $33,750

Nonrefundable credits may offset AMT for 2010 and 2011

AMT “Patch”

For employees:◦ For 2011 only, social security tax withholding is

reduced from 6.2% to 4.2%◦ Applies to first $106,800 or wages◦ Maximum potential savings = $2,136

For self-employed:◦ For 2011 only, social security portion of self-

employment tax is reduced from 12.4% to 10.4%◦ Applies to first $106,800 or wages◦ Maximum potential savings = $2,136

Payroll Tax Cut

On Wages:◦ Additional 0.9% Medicare tax◦ Applies to wages in excess of $200,000 for single

persons ($250,000 for a married couple)◦ For tax years beginning after 12/31/2012

On Unearned Income:◦ Additional 3.8% Medicare tax◦ Applies to lesser of --

Net investment income or Modified adjusted gross income in excess of $200,000

for single persons ($250,000 for a married couple)◦ For tax years beginning after 12/31/2012

Additional Medicare Tax

Many temporary tax incentives for individuals had expired by the end of 2009

2010 Tax Relief Act extended most of them for 2010 and 2011

Some of those extended include:◦ State and local sales tax deduction◦ Teacher’s classroom expense deduction◦ Tax-free distributions from IRAs direct to charity◦ Higher education tuition deduction◦ Child tax credit remains at $1000◦ Energy property credit (but less attractive after 2010)◦ Enhancements to earned income tax credit, adoption

credit and dependent care credit remain

Extension of Tax Breaks

Increased Section 179 Expensing Bonus Depreciation New Hire Tax Breaks Small Employer Health Insurance Credit Health Insurance for Self-Employed Other Targeted Tax Benefits

Business Income Tax Topics

Tangible personal property and certain real property (see next slide) can be expensed rather than depreciated under Section 179

Assets must be used in a trade or business Cannot exceed taxable income from all trade or

business activities (including wages) Up to $500,000 can be expensed for 2010 and

2011 Up to $125,000 can be expensed for 2012 Phased out when property purchased exceeds

$2MM; fully phased out at $2.5MM

Increased Section 179 Expensing

Qualifying real property includes◦ Qualified leasehold improvement property◦ Qualified restaurant property◦ Qualified retail improvement property

Taxpayer can elect to exclude real property from Section 179 property

Only $250,000 of real property can be expensed

Increased Section 179 ExpensingQualifying Real Property

Can take 100% bonus depreciation for qualified property placed in service between 9/9/2010 and 12/31/2011

Can take 50% bonus depreciation for all other periods during 2010 through 2012

No dollar limit Not limited to taxable income Must be new (not used) property Same property qualifies as 2009 law

◦ MACRS recovery period of 20 years or less◦ Computer software not self-created◦ Qualified leasehold improvement property

Bonus Depreciation

Applies to new hires of “covered employees” ◦ Generally, a covered employee is one who was

unemployed for 60 days prior to hire◦ Must begin employment between 2/4/2010 and

12/31/2010◦ Must complete W-11, affidavit of eligibility

Payroll Tax Exemption:◦ Exempt from employer’s 6.2% social security tax◦ Applies to wages paid 3/19/2010 - 12/31/2010

New Hire Retention Credit◦ Must retain employee for 52 consecutive weeks◦ Lesser of $1000 or 6.2% of wages paid

New Hire Tax Breaks

Tax credit for eligible small employers that cover at least 50% of the cost of health insurance premiums

Eligible small employer:◦ Fewer than 25 full-time equivalent employees◦ Average annual wages no greater than $50,000

Amount of credit equals 35% of the lesser of:◦ Employer paid health insurance premiums for qualified

health insurance coverage; or◦ Average premium for small group market in your State

(Texas = $5,140 for individual coverage; $11,972 for family coverage)

Applies for years beginning in 2010 - 2013

Small Employer Health Insurance Credit

Income tax deduction “above the line” for cost of health insurance for self, spouse, dependents, and children under age 27

Self-employment earnings reduced by health insurance for purposes of self-employment tax (for 2010 only)

Deduction will not reduce earned income for other purposes (e.g. income eligible for retirement plan contribution)

Only for first taxable year beginning in 2010

Health Insurance for Self-Employed

Exclusion of gain on qualified small business stock

Five year carryback of general business credit

S Corporation – reduction in required holding period to avoid built-in gains tax

Increased deduction for start-up expenditures

Other Targeted Tax Benefits

Gift Tax Estate Tax

◦ Default Rule◦ Carryover Basis Election◦ Extension of Time to File and Pay and Make

Disclaimers◦ Portability◦ “Clawback” Issue

GST Tax

Estate Tax Topics

Exemption:◦ $1 million for 2010◦ $5 million for 2011 and 2012

Indexed for inflation beginning in 2012 Planning Opportunity:

◦ Donors that have previously made taxable gifts exceeding $1 million may make up to $4 million of additional gifts without incurring gift tax

◦ Donors that have not previously made gifts exceeding $1 million may make additional gifts equal to the difference between $5 million and the amount of their prior taxable gifts without incurring gift tax

2001 rules apply after 2012

Gift Tax

Estate tax applies to decedents dying in 2010

Exemption is $5 million for 2010 – 2012◦ Indexed for inflation beginning in 2012

Maximum tax rate is 35% for 2010 - 2012 Rules in effect in 2001 apply after 2012

Estate Tax – Default Rule

Election to apply the carryover basis rules rather than the estate tax rules may be made for decedents dying in 2010

Election is to be made “at such time and in such manner” as prescribed by the Secretary of the Treasury or his delegate◦ Form 8939 – not yet released

Small estates won’t make the election Large estates generally will make the

election, but a variety of factors should be considered

Estate Tax – Carryover Basis

Estate tax return and payment due date for 2010 decedents is extended to September 19, 2011

Carryover basis report (Form 8939) was not granted a nine-month extension by TRA 2010◦ Currently due 4/15/2011, but rumor has it that the

IRS may grant an administrative extension until 10/15/11

Estate Tax - Extensions

The time for making any disclaimer for property passing by reason of a decedent’s death in 2010 is extended to nine months after date of enactment◦ Disclaimer period is extended to September 19, 2011 for

decedents who die on or after January 1, 2010 and before December 17, 2010

◦ Normal nine-month disclaimer period applies for decedents who died after December 16, 2010

Planning opportunity – disclaimer of a 2010 bequest that then passes to a skip person would not be subject to GST tax (since GST tax rate is zero for 2010)

Estate Tax – Extensions (cont.)

The executor of a deceased spouse’s estate may transfer any unused estate tax exemption to the surviving spouse

The executor of the first spouse’s estate must timely file an estate tax return and make an election to permit the surviving spouse to utilize the unused exemption◦ Thus, even small estates of married persons must consider

whether to file an estate tax return for the first deceased spouse’s estate

Only the most recent deceased spouse’s unused exemption may be used by the surviving spouse◦ This rule applies even if the last deceased spouse has no

unused exclusion or does not make a timely election

Estate Tax - Portability

Additional exemption may be used for gift tax purposes or estate tax purposes, but not for GST tax purposes

Applies for decedents dying and gifts made after 2010

Only available for two years – expires after 2012

Estate Tax – Portability (cont.)

If the estate tax exemption is decreased in the future, it is not clear how the estate tax is to be calculated for taxpayers that have made taxable gifts in excess of the reduced exemption amount

Following the Form 706 instructions, the deduction for “total gift tax paid or payable” is calculated using the exemption “in effect for the year the gift was made”◦ This results in estate tax being due on the adjusted taxable

gifts if the later estate tax exemption is less than the current gift tax exemption

◦ “Clawback” amount will equal the amount of taxable gifts times the estate tax rate

Examples

Estate Tax – “Clawback” Issue

Retroactively reinstated to January 1, 2010 Tax rate is zero in 2010 and 35% in 2011 and

2012 $5 million exemption in 2010, 2011, and 2012

◦ Indexed for inflation beginning in 2012 Observations:

◦ Exemption can be allocated to GST transfers made in 2010 A zero tax rate for 2010 does not mean that transfers

to trusts in 2010 automatically result in a zero inclusion ratio – exemption may need to be allocated

GST Tax

Observations (cont.):◦ Consideration should be given to electing out of the

automatic allocation of GST exemption to direct skip transfers made in 2010

◦ Appears that the carryover basis election does not apply for GST tax purposes Thus, decedents who make the carryover basis election

will still be subject to GST tax and may still allocate GST exemption Query, however, how one allocates GST exemption if

carryover basis election is made

◦ Consider “curing” non-exempt trusts during 2011 and 2012 with allocation of additional $1.5 million GST exemption

GST Tax (cont.)

Presented by:

Connie L. Estopinal CPA/PFS Managing Partner Mohle Adams 3900 Essex Lane, Suite 1000 Houston, TX 77027 (713) 629-1381 cestopinal@mohleadams.com

2010 Significant Tax Law Changes