Monday, December 20, 2010

Select Tax Provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”), signed into law by President Obama on December 17, 2010, extends generally for two years certain tax code provisions that expired or will expire at the end of 2010.

Select income tax provisions of the Act include:

1. Relating to U.S. citizens and resident aliens

a. The highest ordinary income tax rate remains at 35% for all individuals through 2012.
b. The highest income tax rate on long-term capital gains and qualified dividend income remains at 15% for all individuals through 2012.
c. Itemized deductions for all individuals through 2012 are not subject to an overall limitation which would otherwise reduce the itemized deductions by up to 80%.
d. Individuals may exclude all gains from the sale of certain small business stock acquired at original issue in 2011.
e. Taxpayers may deduct private mortgage insurance premiums paid or accrued in 2011 in connection with acquisition indebtedness on a qualified residence.
f. Taxpayers may elect to deduct state and local sales tax in lieu of state and local income tax through 2011.
g. Taxpayers may offset the entire regular and alternative minimum tax liability for 2010 and 2011 by certain nonrefundable personal credits (e.g. dependent care credits, child credits, etc.).
h. The tax rate of the individual portion of the social security tax for remuneration received in 2011 is reduced by 2%, from 6.2% to 4.2%. In the case of self-employment, the social security tax rate for taxable years of individuals that begin in 2011 is also reduced by 2%, from 12.4% to 10.4%.

2. Relating to foreign shareholders of a regulated investment company (“RIC”)

a. For 2010 and 2011, foreign shareholders of a RIC are generally not subject to U.S. federal income tax and withholding tax on dividends designated as arising from the RIC’s certain interest income that would not be subject to U.S. tax if earned by the foreign shareholders directly. Similar rules apply to certain short-term capital gain dividends.
b. Also for 2010 and 2011, an interest in a RIC can not be treated as U.S. real property interest, and any distribution from a publicly traded RIC that is attributable to the sale of a U.S. real property interest, is exempt from U.S. federal income tax if the distribution is to a foreign shareholder who holds no more than 5% of the publicly traded stock. However, withholding tax otherwise required for distributions made prior to December 17, 2010 is not affected.

3. Relating to controlled foreign corporations (“CFCs”)

a. For 2010 and 2011, U.S. shareholders of a CFC are not taxed currently on the CFC’s active financing income.
b. Also for 2010 and 2011, U.S. shareholders of a CFC are not required to include any dividend, interest, rent and royalty income received by the CFC from a related CFC, to the extent such income is attributable to the related CFC’s income that is not dividend, interest, rent, royalty, or other “subpart F income” or income effectively connected with a U.S. trade or business.

4. Relating to the 100-percent expensing for certain business assets (“Bonus Depreciation”)

a. The 100-percent Bonus Depreciation is extended to qualified property placed in service before January 1, 2012 (or before January 2013 for certain longer-lived and transportation property).
b. The Bonus Depreciation will be 50% for qualified property placed in service in 2012 (or in 2013 for certain longer-lived and transportation property).
c. A corporation generally may increase its minimum tax credit limitation by the Bonus Depreciation with respect to certain property placed in service in 2011 or 2012 (or through 2013 in the case of certain longer-lived and transportation property).

The key non-income tax provisions made by the Act are to modify the estate, generation-skipping and gift tax provisions in a number of significant respects, including:

1. Providing that for 2011 and 2012, there will be a $5 million estate, generation-skipping and gift tax exemption (which will be indexed for inflation beginning in 2012) per individual and a maximum estate, generation-skipping and gift tax rate of 35%. The new exemption and tax rate generally apply in 2010, except that the gift tax exemption for 2010 remains at $1 million and the generation-skipping tax rate for transfers made in 2010 is zero;

2. Allowing the estates of decedents who died in 2010 to elect to pay no estate tax but have a modified carry-over basis regime for their heirs;

3. Adopting a portability concept for the new $5 million exemption from estate and gift tax, but not generation-skipping tax; and

4. Providing an extension for certain tax filings and disclaimers for decedents dying in 2010 before enactment of the new law.

The Act also extends for 2 years the code provision that excludes from the estates of nonresident decedents the stock of a RIC to the extent the RIC’s assets are debt obligations, deposits or other property that would be treated as situated outside the U.S. if held directly by the estates.

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