Congress adjourned its year-end lame-duck session on December 22 after passing legislative fixes for several pending tax issues, including the estate tax, the expiration of the 2001 and 2003 tax cuts, an alternative minimum tax (AMT) patch, and extensions of many expired provisions. However, it failed to repeal the expanded Form 1099 reporting requirements that were enacted as part of this spring’s health care reform legislation.
The tax changes made during the lame-duck session were enacted as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010, P.L. 111-312), which Congress passed on December 16, and President Barack Obama signed into law the next day.
Expanded 1099 Requirements
One major tax issue Congress did not resolve was the expanded Form 1099 reporting requirement. Currently, payments to corporations are excepted from the Form 1099 information-reporting requirements. But starting for payments after December 31, 2011, businesses will be required to file an information return for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). This change was made by the Patient Protection and Affordable Care Act (P.L. 111-148), enacted in March 2010. In addition, in a change made by the Small Business Jobs Act (P.L. 111-240), taxpayers who receive rental income from property will be required to issue Forms 1099 to service providers for payments of $600 or more during the year, effective for payments made after December 31, 2010.
The Tax Relief Act of 2010 does not include a provision to repeal any of the expanded Form 1099 reporting rules; two votes to repeal the expanded Form 1099 requirement rules with regard to corporations failed to pass the Senate on Nov. 29. In December, Senate Finance Committee Chairman Max Baucus, D-Mont., introduced a separate bill to repeal the new 1099 rules with regard to corporations (not landlords), but he was unable to obtain the unanimous consent needed to advance the legislation.
According to Peter Kravitz, AICPA Director–Congressional & Political Affairs, Congress is likely to revisit this issue early in 2011. However, as of January 1, 2011, taxpayers who receive income from rental property should start keeping adequate records of payments, so they will be prepared to issue correct 1099s in 2012. They will also need to obtain the name, address and taxpayer identification number of the service provider, using Form W-9 or a similar form.
Background. In 2001, Congress enacted the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, P.L. 107-16), which slowly repealed the estate and generation-skipping transfer (GST) taxes. Under the EGTRRA provisions, the estate and GST tax rates gradually declined until the estate and GST taxes were eliminated in 2010. However, as the EGTRRA was being passed in 2001, the congressional conference committee added a sunset provision to keep the costs of the bill small enough to ensure widespread support in Congress. Under the sunset provision, the estate tax repeal was to be in effect for 2010 only. After that, the estate and GST regime in place before the passage of the EGTRRA would spring back to life, as if the EGTRRA had never been enacted. This meant that starting January 1, 2011, the estate tax exemption would be $1 million (adjusted for inflation), the tax rate would be 55%, and the state death tax credit would be revived.
Carryover basis. The EGTRRA also repealed the step-up in basis for assets passing at death. Instead, it subjected inherited assets to a modified carryover basis rule in 2010. Under this new rule, a recipient’s basis in property acquired from a decedent will be the lesser of the adjusted basis of the property at death or the fair market value (FMV) on the date of death. The carryover basis provision was also scheduled to sunset after December 31, 2010.
Changes for 2010, 2011 and 2012. Under the Tax Relief Act of 2010, the estate tax rate is set at 35% for two years (through 2012) and the estate tax exemption is $5 million (adjusted for inflation after 2011). For estates of decedents dying in 2010, an election will be available either to be subject to the reinstated estate tax or to be subject to the modified carryover basis rule. The election between the reinstated estate tax and the modified carryover basis rule is made by the estate, not the beneficiaries, who would be subject to tax under the carryover basis rule.
Extensions for 2010 returns. Because of this newly available election, estates of decedents dying in 2010 are given an extension to file an estate tax return until nine months after the date of enactment of the Tax Relief Act of 2010.
Portability. The estate tax exemption is made “portable” between spouses, meaning that the surviving spouse’s exemption is increased by any exemption amount not used by the first spouse to die. This provision applies to taxpayers dying after December 31, 2010.
GST tax. The Tax Relief Act of 2010 also reinstates the generation-skipping transfer tax, and the due date for filing a return is extended to nine months after the date of enactment (December 17, 2010). However, for generation-skipping transfers made during 2010, the GST tax rate is zero. For 2011 and 2012, the GST tax rate will be 35%. Unlike the estate tax exemption, the new law does not make the GST exemption portable.
Unified credit. The Tax Relief Act of 2010 also restores the unified credit against gift tax for gifts made after 2010.
State death tax credit. The EGTRRA repealed the state death tax credit and replaced it with a deduction against the estate tax after 2004. Under the EGTRRA sunset, the state death tax credit was scheduled to be reinstated in 2011, but the Tax Relief Act of 2010 extends the deduction through 2012.
Expiration of EGTRRA Tax Cuts
Background. The EGTRRA introduced a new 10% tax bracket for individuals and reduced the tax brackets above the 15% bracket to 25%, 28%, 33% and 35%. Those changes were scheduled to sunset after 2010, so that in 2011 the 10% rate would disappear and the other rates would revert to 28%, 31%, 36% and 39.6%.
Tax rates. The Tax Relief Act of 2010 extends the EGTRRA tax rates for two years, through 2012. The EGTRRA’s income tax rates for estates and trusts (15%, 25%, 28%, 33% and 35%) are also continued for two years.
Marriage penalty. The EGTRRA expanded the size of the 15% tax bracket for married couples filing jointly and increased the basic standard deduction for joint filers to help offset the “marriage penalty” affecting two-earner couples. The Tax Relief Act of 2010 extends this marriage penalty relief through 2012.
Capital gains. In 2003, the Jobs and Growth Tax Relief Reconciliation Act (P.L. 108-27) lowered the long-term capital gains tax rate to 15% (0% for taxpayers in the 10% and 15% tax brackets), which was also scheduled to expire after 2010. The Tax Relief Act of 2010 extends the 15% and 0% capital gains tax rates for both the regular tax and the AMT for two years.
Itemized deductions and personal exemptions. The EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout, scheduled to sunset in 2011, is extended for two years.
Payroll tax. For 2011 only, the Tax Relief Act of 2010 reduces the rate for the Social Security portion of payroll taxes to 10.4%, by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remains at 6.2%).
Withholding tables. The IRS has released withholding tables for use in 2011 that reflect the changes made by the Tax Relief Act of 2010. Employers are instructed to begin using the new withholding tables as soon as possible and no later than January 31, 2011.
The alternative minimum tax (AMT) exemption amount has been temporarily increased by legislative action several times in recent years. The most recent patch was for 2009; for 2010 the AMT exemption amount was scheduled to revert to its statutory amount: $45,000 for married individuals filing jointly, less 25% of alternative minimum taxable income exceeding $150,000; and $33,750 for unmarried individuals, less 25% of alternative minimum taxable income exceeding $112,500.
The Tax Relief Act of 2010 includes a patch of the AMT exemption amounts for 2010 and 2011. For 2010, the AMT exemption amounts are $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. For 2011, the amounts are $48,450 and $74,450, respectively.
The Tax Relief Act of 2010 also extends through 2011 the ability to use nonrefundable personal credits to offset AMT (under Sec. 26(a)).
Bonus Depreciation and Sec. 179 Expensing
The Tax Relief Act of 2010 allows taxpayers to deduct 100% of the cost of business property acquired after September 8, 2010, and before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property). The act also extends the election to accelerate pre-2006 AMT tax credits in lieu of bonus depreciation to property acquired after December 31, 2007, and placed in service in 2011 or 2012. However, the election does not apply to property placed in service in 2010.
The act also sets the expensing limitation under Sec. 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. The act then reduces these amounts to $25,000 and $200,000 for tax years beginning after 2012.
Extension of Expired Provisions
A variety of temporary tax provisions, often referred to as “extenders,” expired at the end of 2009 or were scheduled to expire at the end of 2010. These expired provisions include tax credits, deductions and various tax incentives. The Tax Relief Act of 2010 extends many of these expired provisions, but a few were left expired.
Some of the more notable provisions for individual taxpayers that have been extended include:
- The itemized deduction limitation was repealed for 2010, and the legislation extends that repeal for two years;
- The personal exemption phaseout was repealed for 2010, and the deal extends that repeal for two years;
- The increased standard deduction for married taxpayers filing jointly, schedule to expire after 2010, is continued for two years;
- The $1,000 child tax credit amount will continue for two years, instead of reverting to $500, and refundability of the credit and the provision allowing the credit against the AMT are extended;
- The increased starting and ending points for the earned income credit are continued for two years (however, the advance payment option for the earned income credit has been abolished);
- The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one), will continue for two years;
- The American opportunity tax credit will continue for two years;
- The temporary 100% exclusion of gain from the sale of certain small business stock under Sec. 1202, enacted by the Small Business Jobs Act of 2010, is extended through 2011;
- The $5,250 employee education-assistance exclusion under Sec. 127 is extended for two years;
- The elimination of the 60-month rule for above-the-line student loan interest deductions and expanded phaseout range is extended for two years;
- The $2,000 increased maximum for Coverdell ESA contributions is extended for two years; and
- The exclusion from income for certain scholarship programs is extended for two years.
For businesses, important extended provisions include:
- The 100% first-year depreciation for property placed in service in 2011;
- The two-year extension of the Sec. 41 research and development credit.
Additional Tax Credits Extended
The following temporary tax credits are extended through 2011 by the Tax Relief Act of 2010:
- Sec. 25C credit for nonbusiness energy property (which would also be returned to the limitations and standards applicable before amendment by the American Recovery and Reinvestment Act of 2009, P.L. 111-5);
- Sec. 30C alternative fuel vehicle refueling property credit;
- Sec. 40 credit for alcohol used as a fuel;
- Sec. 40A credit for biodiesel and renewable diesel fuel;
- Sec. 41 research and development credit;
- Sec. 45(d)(8) credit for refined coal facilities;
- Sec. 45A Indian employment tax credit;
- Sec. 45D new markets tax credit;
- Sec. 45G credit for certain railroad track expenditures;
- Sec. 45L new energy-efficient home credit;
- Sec. 45M energy-efficient appliance credit;
- Sec. 45N mine rescue team training credit;
- Sec. 45P employer wage credit for active duty members of the uniformed services;
- Sec. 51 work opportunity credit;
- Sec. 54E qualified zone academy bonds (but not the section 1397E credit for holders of qualified zone academy bonds, and the section 6431 refundable credit is repealed);
- Sec. 1400C credit for first-time D.C. homebuyers;
- Secs. 6426 and 6427 excise tax credits for alternative fuels; and
- American Samoa economic development credit under the Tax Relief and Health Care Act of 2006 (P.L. 109-432).
Additional Deductions Extended
The following expired and expiring temporary deductions are extended through 2011 by the Tax Relief Act of 2010:
- Sec. 62(a)(2)(D) deduction for elementary and secondary school teachers;
- Sec. 163(h)(3)(E) treatment of mortgage insurance premiums as interest;
- Sec. 164 state and local sales tax deduction;
- Sec. 168(e)(3)(E) 15-year straight-line cost recovery for qualified leasehold improvements and for qualified restaurant improvements(extended to property placed in service in 2011);
- Sec. 168(i)(15)(D) seven-year cost recovery period for motor sports entertainment complexes (extended to facilities placed in service in 2011);
- Sec. 168(j) accelerated depreciation for property on Indian reservations (extended to property placed in service in 2011);
- Sec. 170(b)(1)(E) contributions of capital gain real property made for conservation purposes;
- Sec. 170(e)(3)(C) enhanced deduction for contributions of food inventory;
- Sec. 170(e)(3)(D) enhanced deduction for contributions of book inventory to public schools;
- Sec. 170(e)(6) enhanced deduction for corporate contributions of computer equipment for educational purposes;
- Sec. 179E(g) election to expense advanced mine safety equipment;
- Sec. 181(f) expensing treatment for certain film and television productions;
- Sec. 198(h) expensing of environmental remediation costs;
- Sec. 199(d)(8) deduction for income attributable to domestic production activities in Puerto Rico;
- Sec. 222 deduction for tuition and related expenses; and
- Sec. 1367(a)(2) basis adjustment to stock of S corporations making contributions to charity.
Other Extended Provisions
Other expired and expiring provisions that are extended through 2011 by The Tax Relief Act of 2010 include:
- Sec. 132 parity for exclusion from income for employer-provided mass transit passes and parking benefits;
- Sec. 168(n) expensing and special depreciation allowance for qualified disaster-assistance property (extended through 2012);
- Sec. 408(d)(8) allowance for tax-free distributions from individual retirement plans for charitable purposes;
- Sec. 451 special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities;
- Sec. 512(b)(13) special rules for certain amounts received by tax-exempt organizations from controlled entities;
- Sec. 613A(c) suspension of limitation on percentage depletion for oil and gas from marginal wells;
- Sec. 871(k) treatment of regulated investment company dividends and assets;
- Sec. 897(h) qualified investment entity treatment of regulated investment companies under the Foreign Investment in Real Property Tax Act of 1980;
- Secs. 953(e) and 954(h) exceptions for active financing income;
- Sec. 954(c) look-through treatment of payments between related controlled foreign corporations;
- Sec. 2105(d) look-through of certain regulated investment company stock in determining gross estate of nonresidents;
- Sec. 1367(a) basis adjustment to stock of S corporations making charitable contributions of property;
- Sec. 1391 empowerment zone incentives;
- Secs. 1400, 1400A and 1400B District of Columbia Enterprise Zone incentives;
- Sec. 1400L(b) New York Liberty Zone bonus depreciation;
- Sec. 1400N Gulf Opportunity Zone incentives;
- Sec. 7652(f) “cover over” of tax on distilled spirits to Puerto Rico and the U.S. Virgin Islands; and
- Grants under the American Recovery and Reinvestment Act of 2009 for specified energy property in lieu of tax credits.
Provisions Not Extended
A few expired provisions that were contained in earlier proposed extenders legislation but that do not appear in the Tax Relief Act of 2010 include:
- Sec. 30B credit for alternative motor vehicle credit for advanced lean burn technology motor vehicles, qualified hybrid motor vehicles, and qualified alternative fuel vehicles;
- Sec. 63(c) standard deduction for real property taxes for non-itemizing taxpayers;
- Sec. 165(h) deduction for personal casualty losses in federally declared disasters;
- Sec. 172(j) carryback of net operating losses attributable to federally declared disasters; and
- Sec. 1400E renewal community tax incentives.
Refunds and Federal Assistance
Under the Tax Relief Act of 2010, any refund made to an individual will not be taken into account as income for purposes of determining eligibility for any federal assistance or assistance under a state or local program financed by federal funds (new Sec. 6409).