Tax relief is broad, if only temporary

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The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, a multibillion-dollar tax cut package signed into law by President Barack Obama on Dec. 17, extends for two years Bush-era capital gains, dividend and individual tax cuts. The act also extends lower income and capital gains tax rates for individuals while extending and enhancing many breaks for businesses.
Impact on businesses
The 2010 Tax Relief Act provides businesses with enhanced investment incentives and more, including bonus depreciation, Sec. 179 expensing, research credits and other benefits. For example, the act encourages businesses to invest by significantly enhancing bonus depreciation. It does so by temporarily increasing this additional first-year depreciation allowance to 100 percent and then provides a 50 percent allowance for 2012. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water-utility property and qualified leasehold improvement property.
• The act also extends the provision allowing corporations to accelerate certain credits in lieu of claiming bonus depreciation for qualified assets placed in service through Dec. 31, 2012 (Dec. 31, 2013, for certain long-lived and transportation property).
• Through Sec. 179, the act also allows smaller businesses to immediately write off the full price of qualifying asset purchases rather than depreciating them over several years. The deduction is reduced by $1 for every dollar of expenses in excess of a phase-out threshold.
• In other changes, the act extends to 2010 and 2011 accelerated depreciation for qualified leasehold improvement, restaurant- and retail-improvement property and allows a shortened recovery period of 15 years rather than 39 years. • The research and development credit, which provides an incentive for businesses to invest in research, also has been extended to 2010 and 2011. And, the work opportunity credit, designed to encourage hiring from certain disadvantaged groups, has been extended for qualifying hires made through Dec. 31, 2011.
• Regarding Social Security, for 2011 only, the act reduces the employee portion of the Social Security tax on earned income from 6.2 percent to 4.2 percent. The self-employed pay both the employee and employer portions of the tax, so the act reduces their rate by 2 percentage points for 2011, from 12.4 percent to 10.4 percent.
Impact on high-income individuals
The Tax Relief Act isn’t limited to tax breaks for businesses. It provides numerous additional tax-saving opportunities, including many that may help reduce individual tax liability.
• The extension of the lower income and capital gains tax rates set to expire Dec. 31, along with significant reductions to the estate tax, are among the valuable tax breaks afforded by the new law. For example, income tax rates (except the 15 percent rate) were scheduled to increase for 2011. The 2010 Tax Relief Act extends the lower rates for all brackets for two years.
• Regarding capital gains, the 15 percent long-term rate, which was scheduled to increase to 20 percent in 2011, will remain through 2012. The act also includes an Alternative Minimum Tax “patch” that increases the eligible deduction for those affected for 2010 and 2011.
• In other changes, the act retroactively returns the estate tax for 2010, but with a $1.5 million exemption increase (to $5 million) and a 10 percentage-point rate reduction (to 35 percent) compared with 2009. It extends these levels to 2011 and 2012, with an inflation adjustment on the exemption for the latter year. In 2013, the exemption and top rate will return to levels prescribed by previous tax law. • While what for 2010 is essentially a repeal of the estate tax, it actually may prove beneficial to many families with loved ones who died this year. Why? Because the estate tax repeal was accompanied by a limit on the step-up in basis, which could have caused many heirs to face significant income tax liability on the sale of inherited assets. For some families the step-up in basis is less of an issue than the estate tax, so the Tax Relief Act provides an option to elect the pre-act estate tax regime for 2010.
• Also of interest to many high-net-worth individuals, the generation-skipping transfer tax, which was repealed for 2010, is back – with the same exemption amounts as the estate tax through 2012. However, the act sets the GST tax rate for 2010 at 0 percent. The GST tax rate goes back up to 35 percent to match the top estate tax rate in 2011 and 2012.
• The act also extends through 2012 provisions in a 2001 tax act that increased the maximum amount of eligible expenses for the dependent care credit from $2,400 to $3,000 for one qualifying dependent and from $4,800 to $6,000 for more than one qualifying dependent through 2010. The maximum credit is generally 20 percent of eligible expenses.
• With the myriad changes going into effect and the uncertainty about what will happen in 2013 when the extensions expire, it is critical to revisit your business, personal and estate tax plans to ensure your business and family are not paying unnecessary taxes. •


David Bussius is a managing director in the tax group at CBIZ Tofias, which has local offices in Newport, Providence and New Bedford. He can be reached at dbussius@cbiztofias.com.

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