Dear clients and friends:
I wanted to provide you with a brief review of the recently-enacted federal tax law – the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”. Whether this law is aptly-named is yet to be seen!
I’ve not tried here to review all the aspects of this new law, or to explain all aspects of the areas I have covered. If you have any questions, or wish to discuss other aspects of this new law, please contact us.
This law is the one we’ve been waiting for – well, maybe! By its terms, the provisions are in effect only through 2012. And as with most tax legislation, the language creates ambiguities; and the practical application is not as straight- forward as the headlines might suggest! Please keep in mind that this review is only that – and no actual transactions are to be entered into based on this information. The actual law is much more involved than could possibly be relayed in this review. Please contact counsel prior to any transactions.
Estate Tax, Gift Tax, Generation Skipping Tax, and Basis of Assets received from Decedents
- For all the uncertainty going forward, we at least now know the 2010 federal estate tax law. The new law provides estates of decedents who died in 2010 a choice. These estates can allow the new law (including a $5,000,000 exemption and full basis “step-up”) to apply, or can elect to apply the “old 2010 law” providing for no estate tax and a limited basis step-up.
- If this election is made by the executor, the Generation Skipping Tax will nonetheless apply for all years, including 2010 (see below).
- The due date for estate tax returns of most 2010 decedents has been extended.
- The new “non-tax threshold” (for estate tax purposes and [starting in 2011] for gift tax purposes) is $5,000,000 (and will be indexed for inflation). The highest federal transfer tax rate is now 35%.
- The federal estate tax and the federal gift tax have therefore been “unified”. While lifetime taxable gifts still “count” toward the estate tax exemption, $5,000,000 of lifetime taxable gifts can be made with no gift tax liability.
- If certain requirements are met, any unused portion of the exemption of the first spouse to die (for deaths after 2010) can be used by the surviving spouse. An estate tax return will need to be filed by the estate of the first spouse to die in order for this opportunity to be available to the surviving spouse.
Generation Skipping Transfer Tax (GSTT)
- The GSTT exemption amount is also now $5,000,000.
- The new GSTT (and its increased exemption amount) now applies back to January 1, 2010 (even to estates of 2010 decedents who elect out of estate tax treatment).
- Generation Skipping Transfers that take place in 2010 (regardless of amount!) are free of GSTT liability.
- This is the most drastic and significant change to the Estate and Gift Tax law since the estate tax was instituted in 1916. It also applies immediately, and with retroactive effect.
- The $5,000,000 federal estate, gift tax, and GSTT exemptions introduce great opportunities for planning.
- The Massachusetts estate tax exemption remains at $1,000,000.
- The mechanics of the detailed aspects of the new law (as well as the interplay of the still-in-effect Massachusetts estate tax) present additional hurdles and opportunities.
- The 0% GSTT rate effective for the balance of 2010 provides an once-in-a-lifetime opportunity – but action must be taken, and the transfers made, during the balance of 2010.
Income Tax Rates
- Income tax rates for 2001 and 2012 will the same as the 2010 rates.
- The top rate on ordinary income will be 35%; the rate on qualified dividends and long-term capital gains will be 15%.
- Contrary to the provisions of the 2001 tax law, the overall limitation of personal itemized deductions will not apply until 2012.
Alternative Minimum Tax (AMT)
- The AMT exemption will remain near current levels for 2011 and 2012, and allow personal credits to offset AMT. This provides relief from the AMT for many taxpayers.
Charitable Gifts from IRAs
- The ability to exclude from income certain IRA distributions that are made directly to charities is applicable to such gifts made in 2010 and 2011.
Social Security payroll tax
- The Social Security payroll tax will be reduced by 2% for 2011.
- The rate for employees will be reduced from 6.2% to 4.2%; the rate for self-employed individuals will be reduced from 12.4% to 10.4%.
Deduction of Cost of Equipment and Machinery
- Businesses will be able to deduct 100% of the cost of equipment and machinery for items placed in service between September 9, 2010 and through December 31, 2011.
- For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
I suggest that these changes (as well as the changes to the Massachusetts probate law effective in July 2011) indicate that taxpayers have their estate plans reviewed by counsel in the near future.
Under the Rules of the Massachusetts Supreme Judicial Court, this may constitute advertising.