2010 Tax Relief Act and the Effect on Individual Tax Returns

2010 Tax Relief Act and the Effect on Individual Tax Returns

On December 17, 2010, the Tax Relief, Unemployment Insurance Re-authorization, and Job Creation Act of 2010 (H.R. 4853) was signed into law by President Obama. Aside from the 13-month extension of unemployment benefits through the end of 2011, this latest tax legislation contains a multitude of important provisions affecting both individual taxpayers and businesses. While mostly it extends a large number of expiring (and expired) tax benefits, it also contains a few new ones. Probably the most significant changes are the extension of the Bush-era tax cuts, an AMT patch, a temporary allowance of 100% expensing using bonus depreciation, changes to the estate tax, and a one-year employee payroll tax cut.
This article will look at the more significant provisions affecting individual taxpayers.
The Act does the following:
1. Extends the "Bush-era tax cuts" for two more years, through 2012, regardless of income. The following provisions are extended through 2012:
Extends the reduction of the individual income tax rates.
Extends the repeal of the personal exemption phase-out for high income individuals.
Extends the repeal of the overall limitation on itemized deductions for high income individuals.
Extends the expansion of the $1,000 per child tax credit, its allowance against the regular tax/AMT, and generally maintains the refundability provisions.
Extends the increased adoption credit amount and the exclusion for employer adoption assistance programs.
Extends the provision that the refundable components of the Earned Income Tax Credit (EITC) and the Child Tax Credit do not make households ineligible for means-tested benefit programs. The Act also extends the increased Earned Income Tax Credit for families with three or more children, as well as the increased phase-out amounts.
Extends the increased amounts of eligible expenses allowed for the dependent care credit.
Extends the marriage penalty relief for the standard deduction (that is, married couples filing joint returns are entitled to a standard deduction equal to double the standard deduction for individual taxpayers).
Extends the marriage penalty relief for those in the 15% tax bracket.
Extends the marriage penalty relief for the earned income credit.
Extends the following changes to Coverdell accounts: the increased annual contribution amount (now $2,000) and the expanded definition of education expenses to include elementary and secondary school expenses. Coverdell accounts are tax-exempt savings accounts used to pay the higher education expenses of a designated beneficiary.
Extends the scholarship income exclusion for the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program.
Extends the following changes for employer-provided education assistance: the $5,250 gross income exclusion and the inclusion of both graduate and undergraduate courses.
Extends the following changes to the student loan interest deduction: the elimination of the 60 month limit and the increase in the income limitation amounts.
Extends the reduced long-term capital gains tax rates.
Extends the reduced tax rate on qualifying dividends (to the same long-term capital gains tax rate).


2. Extends the American Opportunity Tax Credit (Section 25A) through 2012. Generally, the credit is for up to $2,500 per student per year of the cost of tuition and related expenses paid for the first four years of post-secondary education.
3. Increases the Alternative Minimum Tax exemption amounts for tax years beginning in 2010 and again in 2011. For a joint return, the Act increases the AMT exemption amount to $72,450 for tax years beginning in 2010, and $74,450 for tax years beginning in 2011. For an individual who is not married and is not a surviving spouse, the Act increases the AMT exemption amount to $47,450 for tax years beginning in 2010, and $48,450 for tax years beginning in 2011.
4. Extends the special rule for determining the aggregate amount of otherwise allowable nonrefundable personal credits that the taxpayer may claim for the Alternative Minimum Tax for tax years beginning after 2009, through 2011.
5. Reinstates the estate and generation-skipping transfer (GST) tax with the following changes:
Provides a maximum tax rate of 35% with a $5 million exemption (it would have increased to 55% with a $1 million exemption) for decedents dying in 2010 through 2012 and repeals the carryover basis regime (thereby, reinstating the earlier stepped-up basis rules).
For decedents dying in 2010, the executor of the estate may elect to apply the IRS Code as if the estate tax was not reinstated and as if the carryover rules were not repealed.
For generation-skipping transfers made during 2010, the applicable tax rate is zero. For transfers after 2010, the GST tax rate will be equal to the highest estate and gift tax rate (35%).
Reunifies the gift tax with the estate tax for gifts made after 2010, at the same tax rate and with the same exclusion amount. (Therefore, for gifts made in 2010, the gift tax exclusion remains at $1 million and the tax rate is 35%.)
For decedents dying, and transfers made, after 2009 and before December 17, 2010, the filing date for the estate tax return, and the GST return, is extended to 9 months after December 17, 2010 (the date of the Act’s enactment).
For decedents dying after 2011, the $5 million exemption amount will be indexed for inflation. This will also apply to the GST exemption.
For decedents dying after 2010, any unused estate tax exclusion (but not the GST exemption) is generally available to the decedent’s spouse, in addition to the surviving spouse’s own exclusion amount. This is an election that must be made by the executor of the deceased spouse’s estate. This "portability" provision will not apply to decedents dying after 2012.
For the estates of decedents dying, and generation-skipping transfers made, in 2011 and 2012, the state death tax credit is repealed, and a deduction for state death taxes paid is allowed.
Unless there is further legislation, the maximum estate and gift tax rate for estates of decedents dying, and gifts made, after 2012 will be 55%.


6. Cuts the employee share of the Social Security payroll tax by 2% (it was 6.2%) for 2011 only. The taxable wage base remains unchanged at $106,800. Also, for 2011, self-employed individuals will pay 10.4% (it was 12.4%) on self-employment income up to the threshold amount.
7. Extends the $250 above-the-line deduction for professional expenses incurred by elementary and secondary schoolteachers (Section 62(a)(2)(D)) through 2011.
8. Extends the election available to taxpayers who itemize their deductions to deduct state and local sales taxes in lieu of state and local income taxes (Section 164(b)(5)) through 2011.
9. Extends the increased contribution limitations and carryover period (Section 170(b)(1)(E) and (b)(2)(B)) for charitable contributions of certain conservation property through 2011.
10. Extends the above-the-line deduction for qualified tuition and related expenses (Section 222) through 2011.
11. Extends, retroactively and through 2011, the provision allowing taxpayers age 701/2 or older to make tax-free distributions to charities from their traditional IRAs and Roth IRAs up to $100,000 per taxpayer, per taxable year. The Act will allow such transfers made in January 2011 to be treated as if they were made in 2010.
12. Extends the non-business energy property credit (Section 25C), with minor modifications, to property placed in service before 2012. The Act returns the credit structure and rates to those in effect before 2009. This is a nonrefundable credit for a portion of the expenditures improving the energy efficiency of a home.
13. Extends the increase in the monthly exclusion for employer-provided transit and vanpool benefits through the end of 2011.
14. Extends the treatment of certain dividends of regulated investment companies (Section 871) retroactively through 2011. This is for the exemption from the 30% withholding tax for qualified interest-related dividends and short-term capital gain dividends received by a foreign person from a regulated investment company (RIC).
15. Extends the tax incentives for investment in the District of Columbia (Section 1400) retroactively for two years, through 2011. Included is the $5,000 first-time homebuyer credit for the District of Columbia.
16. Extends the deduction for mortgage insurance premiums (Section 163(h)(3)(E)) for one year, through 2011. This provision allows a qualifying taxpayer (based on their AGI) to itemize the cost of mortgage insurance on a qualified personal residence.
17. Extends the temporary exclusion of 100 percent of the gain on certain small business stock (Section 1202(a)) that is acquired after September 27, 2010 and before January 1, 2012, if held for more than five years.