The new tax legislation passed by the House, December 15, and the Senate, December 16, (not to mention signed by the President) is referred to as a tax cut. That’s a misnomer. In fact, the legislation keeps taxes where they are. It prevents taxes from increasing. But a cut? No, not exactly.
Here are some highlights:
Estate and Gift Tax
In 2009, each person had an exclusion amount of $3.5 million they could pass on to their heirs free of federal estate tax and the tax rate on amounts over $3,500,000 was 45%. In 2010 there was no estate tax. With the new legislation, each person has a $5 million exemption, and the tax rate on amounts over $5 million is 35%. If the first spouse to die does not use all of his or her exempt amount, the unused exemption can be added on to the surviving spouse’s exempt amount. This feature is called "portability."
Before anyone starts figuring out how to chain together five or six deceased spouses’ excess exclusion amounts, know this. A surviving spouse may only use the excess exemption amount of his or her last spouse to die. Consider Herman’s Hermit’s ditty about a man named Henry marrying the widow next door who had married seven previous Henrys. If Henry VII just passed away, and the fair widow had $4 million in excess exclusion amount from Henry VI, that $4 million is gone with the death of Henry VII, to be replaced, with the excess amount, if any, from Henry VII. Also consider that if Henry VII’s Executor refuses to elect to assign the excess amount to the fair widow, she gets no excess amount from Henry VII and Henry VI’s excess exclusion amount is still eliminated.
The changes are retroactive to the beginning of 2010, and carryover basis is repealed. However, for estates of 2010 decedents; executors will have an election. They may choose to have the law apply as it was in 2010 without the change made by this legislation. In general, executors of 2010 estates larger than $ 5 million will have to decide whether to pay no estate tax and use carryover basis, or to pay estate tax and get a basis step-up. There is an extension of time to make the election, pay estate tax and file returns of 9 months after enactment. The extension also applies to ancillary planning matters such as disclaimers.
In the new law, the gift tax and the estate tax are "re-unified." The gift tax exemption is $5 million, the same as the estate tax exemption. (There is one $ 5 million exemption which can be used for making life-time gifts or for death-time transfers.) In 2010, the gift tax exemption was $1 million. The annual exclusion from the gift tax for present interest gifts remains at $13,000 per donee.
Generation-Skipping Transfer Tax
The Generation Skipping Transfer Tax (GSTT) is levied on transfers to recipients two or more generations below the donor. The exempt amount for the GSTT is the same as the Estate Tax at the time of the transfer, so for the next two years it will be $5 million. While the estate tax exemption is "portable", the GSTT exemption is not.
• The lowest bracket, 10%, is continued through 2012, rather than reverting to the 15% level. The 10% bracket applies to individuals making up to $8,500 and couples making up to $17,000.
• The 25%, 28%, 33% and 35% brackets would have increased 3%, but now they’ll remain through 2012.
• Phasing out of the personal exemption for those with higher adjusted gross income (AGI, the number at the bottom of page one of the 1040) was repealed for 2010 and now will continue to be repealed for two more years.
• Phasing out of itemized deductions for those with higher AGI was repealed for 2010 and now will continue to be repealed for two more years.
• The Alternative Minimum Tax (AMT) threshold for 2011 is $48,450 for single filers and $74,450 for joint filers.
• Long term capital gains and dividends have been taxed at 0% for those in the 15% tax bracket and at 15% for those above that bracket. This favorable treatment is extended for two more years.
• Child care credit for low income earners with children under 17 had been raised from $500 to $1,000. This increase is extended through 2012.
• The marriage penalty relief for the standard deduction, the 15% tax bracket and the Earned Income Tax Credit (EITC) has been extended through 2012.
• The dependent care credit for those with children under 13 and disabled dependents is $3,000 for one child and $6,000 for two children, and those levels have been extended through 2012.
• EITC for families with three or more children is 45% of the couple’s first $12,570 of AGI, with a phase-out that begins at a higher amount. The new law extends the three child credit and raises the phase out point somewhat through 2012. The two-child credit remains unchanged.
• Above-the-line deductions for teachers for $250 for school supplies was renewed for 2010 and 2011.
• Itemized deductions for state and local general sales taxes in lieu of itemized deductions for state and local government income taxes was renewed through 2011.
• Tax free charitable contributions directly from IRAs up to $100,000 per taxpayer per tax year was extended through 2011. Due to the late passage of the bill, such transfers made in January 2011 may be treated as made in 2010 if the taxpayer so elects.
• The unemployment insurance section provides a one-year extension of the federal unemployment insurance benefits
• Employee-paid payroll taxes are reduced. The rate for 2011 had been 6.2% of all wages earned up to $106,800 and 12.4% for self-employed individuals. The new law reduces these rates two percentage points; 4.2% for social security and 10.4% for self-employed individuals. This change is for 2011 only.
• Additional provisions of the "tax cut" will be highlighted in next week’s entry.
Unemployment Insurance and Payroll Taxes