The biggest changes from the 2010 Tax Relief Act that became law on December 17, 2010 were outlined in last week’s column: extension of the Bush individual and capital gains tax cuts for two years, a one-year payroll tax cut, a top federal estate tax rate of 35% and a $5 million exemption for the estate, gift, and generation-skipping tax. But wait, there’s more:
Adoption and Childcare Provisions
Taxpayers who adopt children can receive a tax credit for qualified adoption expenses. A taxpayer may also exclude from income adoption expenses paid by an employer. The credit and the exclusion from income were both previously raised to $10,000 (both for non-special needs adoptions and special needs adoptions and subject to inflation) and would have expired in 2011, but they are now extended through 2012.
The Patient Protection and Affordable Care Act (PPACA) passed in March 2010 increased the credit and exclusion by another $1,000 to $13,170 for 2010 and 2011 and the new act made the credit refundable for 2010 and 2011.
Existing law provided employers with a credit equal to 25% of qualified expenses for acquiring, constructing, rehabilitating or expanding property which is used for a child care facility. There is an additional 10% credit for child care resource and referral services. The credit is capped at $150,000. The new law extends the credit through 2012.
Expensing Versus Depreciation under Section 179
Under prior law, a taxpayer may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time. The 2010 Small Business Jobs Act increased the dollar and investment limits for the maximum amount that can be deducted as an expense to $500,000 and $2 million, respectively, for 2010 and 2011. The 2010 Tax Relief Act provides for a $125,000 dollar limit and a $500,000 investment limit for 2012.
Energy-efficient new homes credit. The new law extends the credit for manufacturers of energy-efficient residential homes purchased before January 1, 2012.
Energy-efficient appliances. The new law extends through 2011 and modifies standards for the credit for US-based manufacturers of energy-efficient clothes washers, dishwashers and refrigerators.
Energy-efficient existing homes. The bill extends through 2011 the credit for energy-efficient improvements to existing homes, reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act. Standards for property credit eligibility are updated to reflect improvements in energy efficiency.
Refund and tax credit disregard for means-tested programs.
The expiring law provided that the refundable components of the Earned Income Tax Credit and the Child Tax Credit do not make households ineligible for means-tested benefit programs. The new law extends these exclusions from income for purposes of means-tested programs through 2012.
Barring a technical correction, the requirement that GRATS be for a minimum term of ten years was not included. A GRAT is a special grantor trust that people use to transfer assets that are expected to increase greatly in value in a short period of time. To the extent that the appreciation outpaces inflation, leverage is gained in transferring the assets via trust at the end of a two year term. The donor gets the original funding back in an annuity plus two years of normal interest as it exists at the time of transfer, and the beneficiaries get the rest. The shorter the term of the trust, the better the leverage.
Also not included was "portability" of the Generation Skipping Transfer Tax (GSTT) exemption. Taxable transfers to beneficiaries two or more generations younger than the donor get not only the gift (or estate) tax burden, but also a second tax slice taken at the highest estate tax rate, which will be 35%. This is a heavy tax burden on such a transfer, but everyone has an exclusion amount (free pass, so to speak) of whatever is the current Estate tax exclusion amount. The Estate Tax exemption is now "portable", with the surviving spouse being eligible to use the deceased spouse’s unused exclusion amount. But, there is no such portability for the Generation Skipping Transfer Tax. If there will be a large transfer to second-generation beneficiaries in an estate plan, either directly or just in case the first generation doesn’t survive their parents, pre-death estate planning is the only way to use both parents’ full GSTT exclusion.
What Was Not in the Bill
Coverdell Accounts are tax-exempt savings accounts for paying education expenses of a beneficiary. The allowable contribution had been raised from $500 to $2,000 and elementary and secondary education expenses were included in 2001. Those changes will now be continued through 2012.
Exclusion of up to $5,250 from income and employment taxation for employer-provided education assistance is extended through 2012.
Student loan interest deduction up to $2,500 per year is allowed. The 2001 law eliminated the 60-month limit on deductions and raised the phase-out income range beginning at $55,000 AGI (the bottom number on page one of your 1040) for single filers and $110,000 for joint filers. These 2001 improvements are continued through 2012.
The American Opportunity tax credit is available for up to $2,500 of the cost of tuition and related expenses that are actually paid. All of the first $2,000 may be taken as a credit, and 25% of the next $2,000 may be taken. Phase out of the credit begins at an AGI of $80,000 for single filers, $160,000 for joint filers. This credit is now extended through 2012.