TAX & BUSINESS PLANNING IN THE NEWS January 2011 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 A Tax and Business Planning Update The Tax and Business Planning group provides these e-alerts periodically to keep our clients, taxpayers and businesses updated on recently adopted legislation and key changes in tax laws. New Tax Breaks... 2 Postponements 3 Extenders 3 New Estate Tax Law 5 Additional Developments 6 www.polsinelli.com I n this issue, we cover the recently passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This sweeping tax legislation postponed the expiring Bush tax cuts that would have resulted in negative tax consequences for individuals if Congress had not acted. In addition, the tax legislation provides for retroactive tax benefit extenders for individuals and businesses. It also creates new tax incentives for individuals and businesses and provides important estate tax benefits. In this issue we discuss the following elements of the Act: New Tax Breaks Postponements Extenders New Estate Tax Law Additional Developments Tax Return Filing Deadline Extended St. Louis Chicago Denver Phoenix Washington DC New York Wilmington DE Overland Park St. Joseph Springfield Jefferson City Topeka Edwardsville Redefining the business of law. SM
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 planning to file Schedule A, or claim abovethe-line deductions for higher-education tuition and fees or educator expenses. With income taxes set to increase for nearly every individual in a still-slumping economy, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (S. Amdt. 4753 to H.R. 4853) (the Act) on December 17, 2010. The estimated $700 million cost of the Act includes, among many other key tax benefits, new business tax incentives to invest in machinery and equipment and various retroactive extended tax breaks for individuals and businesses. The Act extends all of the Bush era tax cuts for two years, and provides new benefits for individual taxpayers intending to boost the economy. Highlights of the Act s legislative changes, and analysis on how these changes may improve your individual and business tax liabilities, are discussed below. Unfortunately, as a result of the tax changes enacted so late in the year, the IRS needs time to prepare forms and reprogram computer software and, therefore, is advising certain taxpayers who plan to file their 2010 tax returns early that they may have to wait until mid to late February, 2011. Affected taxpayers are primarily those New Tax Breaks The Act contains a number of tax extensions; however, it also contains new tax breaks that may benefit individuals and businesses alike. These tax breaks include a change that allows businesses 100 percent first-year bonus depreciation of qualifying property placed in service after Sept. 8, 2010 and before Jan. 1, 2012. A 50 percent bonus first-year depreciation allowance will apply for such property placed in service after Dec. 31, 2011, and before Jan. 1, 2013. In addition to the new incentive for businesses, the Act provides for a payroll/ self-employment tax cut of two percentage points (from 6.2 percent of wages to 4.2 percent) for 2011 for employees and selfemployed individuals to help stimulate the economy. (Self-employment individuals will pay only 10.4 percent Social Security selfemployment taxes on self-employment income.) The maximum savings for 2011 will be $2,136 (2 percent of $106,800). A key component of this benefit is there is no phase-out of the payroll tax reduction for higher income workers. Unfortunately, employers receive no benefit. Page 2 of 8
Postponements The Act postpones the expiring Bush tax cuts and certain other laws scheduled to sunset for two years: Tax rates. The income tax rates for individuals will stay at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent (instead of moving to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent). Standard deduction for married taxpayers. Under the Act, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200 percent (rather than 167 percent) of the standard deduction for single taxpayers for 2011. Itemized Deductions. Itemized deductions of higher-income taxpayers will not be reduced (under the sunset rule after 2010 they would have been reduced by 3 percent of adjusted gross income above an inflation-adjusted figure, but the reduction couldn t exceed 80 percent). Personal Exemptions. A higher-income taxpayer s personal exemptions will not be phased out when AGI exceeds an inflation-adjusted threshold (under the sunset rule after 2010 they would have been phased out). Capital Gains and Qualified Dividends. The Act defers for two years the sunset of the lower tax rates for long-term capital gains and qualified dividends. Thus, through December 31, 2012, most long-term capital gains and dividends will continue to be taxed at a maximum rate of 15 percent. (Instead of longterm capital gains taxed at 20 percent, 18 percent for assets held more than five years, and dividends taxed at the same rates that apply to ordinary income). Extenders The Act provides for the usual tax extenders retroactively effective January 1, 2010 as discussed below: Business Extenders Research and Experimentation Credit. The research and experimentation credit expired at the end of 2009. The new law retroactively reinstates the credit for 2010 and extends the credit in 2011. 15-Year Depreciation for certain business improvements. The Act extends through 2011 the favorable law that allows qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements to be depreciated over 15 years rather than 39 years. Incentive for Investments in Small Business. As we reported in our last e-alert, Congress recently provided a benefit to Page 3 of 8
encourage investment in certain businesses. The benefit was a 100 percent exclusion and elimination of the alternative minimum tax preference item for capital gain from the sale of qualified small business C Corporation stock acquired after September 27, 2010 and before January 1, 2011, if the stock was owned longer than five years. This 100 percent exclusion has been extended to stock acquired before January 1, 2012, and held for more than five years. The Act includes many other business extenders including the new markets tax credit; railroad track maintenance credit; mine rescue team training credit; employer wage credit for activated reservists; sevenyear write-off for motorsports entertainment facilities; enhanced charitable deductions for contributions of food inventory and for contributions of book inventories to public schools and for corporate contributions of computer equipment for educational purposes; and many other extensions of business benefits. Charitable IRA Rollovers. The Act extends through 2011 the tax law that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000, per taxable year for individuals who have reached age 70 1/2. A key planning opportunity available until the end of January 2011 allows individuals to make charitable transfers during January 2011 and treat them as if made during 2010. If you have not already taken your required distributions for 2010, you may be able to make a charitable rollover by January 31, 2011 and have it count toward your 2010 required minimum distribution. Accordingly, there is only a short window of opportunity to take advantage of this incentive for 2010. Individual Extenders Alternative Minimum Tax (AMT) Patched for Two Years. The Act s two-year AMT patch would raise the exemption level from $45,000 for couples to $72,450 in 2010 and $74,450 in 2011. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010. The Act extends numerous other individual incentives, highlights of which include the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes; increased contribution limits and carry-forward period for contributions Page 4 of 8
of appreciated real property (including partial interests in real property) for conservation purposes; and the above-theline deduction for qualified tuition and related expenses. Basis for Assets Received from Decedents New Estate Tax Law The Bush tax cuts in 2001 completely repealed the estate tax and generation skipping transfer taxes and changed the way the basis of an asset received from a deceased person is determined but only for 2010. The Act modified tax law applicable for persons who passed away in 2010 or later, and created a new choice for estates of those who passed away in 2010. This report covers changes made by the Act concerning the basis of assets received from a decedent; provisions of the Act concerning the estate, gift, and generation-skipping taxes will be covered separately. Estates of persons who passed away in 2010 can now choose whether to apply the law under the Act or the law in effect prior to the Act. New Law: Estates that choose to apply the law under the Act will be subject to estate tax (with an increased exemption and decreased rate), and the basis of assets received from 2010 decedents will be stepped up to their fair market value as of the date of death, potentially decreasing the capital gains tax owed when the asset is sold. Estates of 2010 decedents will also have until September 17, 2011, to file a federal estate tax return (if required). Prior Law: Estates that choose to apply the prior law will not be subject to estate tax, but assets received from these decedents will not automatically have their basis stepped up. Instead, assets will generally keep their prior basis ( carryover basis ), but executors can allocate $1.3 million in additional basis among the decedent s assets, and an additional $3 million in basis for assets passing to a surviving spouse. A special tax return must be filed to make these basis allocations, but the IRS form has not yet been finalized. As a result of electing application of prior law, estates making an election to apply prior law may pay less in estate tax, but recipients of assets may pay increased capital gains tax when assets are sold. The new law applies for persons who pass away in 2011 or later. However, all of the changes made by the Act sunset or terminate in 2012, so that Congress will have to go through the process of once again reviewing the law and determining the rules that apply at that time. That is a presidential election year, so it is likely that Congress will not act on the tax laws until after the election is over once again. Because of the complexity of these rules, taxpayers as well as practitioners will have a number of questions and issues concerning Page 5 of 8
estates and trusts in 2010, transactions under the new rules in 2011, and transitional rules during each year. Additional Developments Tax Return Filing Deadline Extended In a recent Notice, the IRS announced that the filing deadline for 2010 tax returns is extended to April 18, 2011. The reason given by the IRS is that April 15 is a holiday in the District of Columbia. The extension also reflects the extensive changes created by the Act, and other tax law changes enacted by Congress that impact 2010 returns. Not to mention the fact that a number of the tax forms will have to be updated by the IRS. While most taxpayers will welcome the additional time to file, many tax preparers are lamenting the fact that they will have another weekend of work before the new filing deadline. For More Information If you would like to discuss any of these legislative changes, discuss portions of the Act not covered in this e- Alert, or discuss other possible actions, please contact one of attorneys listed on the next page. Page 6 of 8
TAX & BUSINESS PLANNING ATTORNEYS William J. Sanders, Chair 816.360.4240 wsanders@polsinelli.com David N. Zimmerman, Vice-Chair Overland Park 913.234.7529 dzimmerman@polsinelli.com Christopher S. Abrams 816.395.0602 cabrams@polsinelli.com J. Michael Cornett St. Louis Washington, D.C. 314.889.7031 mcornett@polsinelli.com John F. Crawford 816.572.4476 jcrawford@polsinelli.com Carl. R. Desenberg St. Louis 314.552.6887 cdesenberg@polsinelli.com Erik R. Edwards 816.360.4128 eedwards@polsinelli.com Steven H. Goodman 816.374.0572 sgoodman@polsinelli.com Virginia C. Gross 816.360.4109 vgross@polsinelli.com About Polsinelli Shughart PC s Tax and Business Planning Group The Tax and Business Planning practice group provides these e-alerts periodically to keep our clients, taxpayers and businesses updated on recently adopted legislation and key changes in tax laws. We intend to provide these alerts to you as new developments warrant. This Tax Alert focuses on a variety of issues impacting businesses and individuals at the federal and state level. If you have questions about any of the information contained in this e-alert, please contact your legal or tax advisor or a member of the Polsinelli Shughart PC Tax & Business Planning practice group at 1-800-473-6014. All companies, organizations and individuals can expect to encounter issues in the tax arena. The Tax Group of Polsinelli Shughart PC provides creative solutions and legal guidance on international, federal, state and local tax laws to entities in all major industries and tax status classifications. Our attorneys partner with our clients to develop business solutions for both short-term and long-term planning. The Tax Group s strong reputation is built on its skills in sound and effective planning, in-depth analysis and favorable resolutions and outcomes, particularly in complex tax matters involving diverse businesses. Our attorneys pride themselves on innovative thinking and expertise in structuring business formation, combinations, reorganizations, mergers and acquisitions, and liquidations in the most taxadvantageous manner. To learn more about our services, visit us online at www.polsinelli.com. D. Scott Lindstrom Overland Park 913.234.7509 slindstrom@polsinelli.com S. Patrick O Bryan 816.360.4237 pobryan@polsinelli.com William B. Prugh 816.374.0570 wprugh@polsinelli.com Thomas J. Schenkelberg 816.360.4124 tschenkelberg@polsinelli.com J. Harlan Stamper 816.374.0544 hstamper@polsinelli.com Tommy W. Taylor 816.374.0541 ttaylor@polsinelli.com Page 7 of 8
TAX & BUSINESS PLANNING ABOUT About Polsinelli Shughart PC With more than 500 attorneys, Polsinelli Shughart PC is a national law firm that is a recognized leader in the areas of business law, financial services, real estate and business litigation. Serving corporate, institutional and individual clients, Polsinelli Shughart is redefining the business of law by sharing ideas, goals and outcomes with its clients. The firm builds enduring relationships by creating value beyond legal services - with passion, ingenuity and a sense of urgency. The firm has offices located in ; St. Louis; Phoenix; Chicago; Denver; Washington, D.C.; New York; Wilmington, Del.; Overland Park, Kan.; St. Joseph, Springfield, and Jefferson City, Mo.; Topeka, Kan.; and Edwardsville, Ill. The firm can be found at www.polsinelli.com. About this Publication If you know of anyone who you believe would like to receive our e-mail updates, or if you would like to be removed from our e-distribution list, please contact Therese O Shea via e-mail at toshea@polsinelli.com. Polsinelli Shughart PC provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship. The following legend is affixed pursuant to U.S. Treasury Regulations governing tax practice. Any U.S. Federal tax advice contained in this communication (whether distributed by mail, e-mail, fax, or other means) is not intended or written to be used, and cannot be used, by any person for the purposes of (1) avoiding U.S. Federal tax penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended, or (2) promoting, marketing or recommending to another party any tax-related matter addressed herein, whether an entity, investment plan or other transaction. Polsinelli Shughart is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements. Polsinelli Shughart is a registered trademark of Polsinelli Shughart PC. Page 8 of 8