Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

                        President Obama signed into law on December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “TRUIRJCA”).  The new tax act puts a little something under the Christmas tree for everyone.

                        1.         Tax Rates.  Everyone is most likely aware that the new law extends the Bush's income tax cuts, the Bill for 2011 and 2012. 

                        2.         Estate Tax.  The bill gives an option in the case of 2010 Decedents.  Currently the Federal estate tax (the "estate tax") is repealed in 2010.  Therefore, for a person dying in 2010, regardless of the size of his or her estate, no estate taxes will be due.  Also, for 2010 there is no "step-up" in basis provision.  Instead, current law grants every decedent a total of $1,300,000 in “step-up” adjustments which the decedent's executor can allocate to appreciated assets owned by the decedent at death.  

                        A.        Repeal is "Repealed" Under the new law; the estate tax repeal is "repealed," so that the estate tax would once again be effective for persons dying in 2010.  However, the exemption amount would be set at $5,000,000 and the top estate tax rate would be 35%.  The $5,000,000 exemption amount would be indexed for inflation after 2011.  As for the income tax issues, because the estate tax is revived, so too are the former "step-up" rules, so that if the estate is subject to the estate tax, all of the estate's assets receive a full "step-up" in cost basis to the value of such assets at the decedent’s death.

                        B.        Opt Out of the Estate Tax.  A special election would be available for all decedents dying in 2010 whereby the estate can "opt out" of the estate tax, meaning that no estate tax would be due for 2010, and the estate would be subject to the 2010 rules as if the TRUIRJCA had not been passed.  For example, estates of decedents whose estates are well in excess of $5,000,000 may wish to opt out of the estate tax and forego the full cost basis “step-up” because the overall tax that would be due on the recognition of gain would be less than the estate tax that would be due on the decedent’s death. 

                        C.        Returns.  As of now, it is not known how the "opt-out" election will be made; the Internal Revenue Service (the "IRS") will eventually publish rules and forms guiding taxpayers on the election.  In addition, should an estate be subject to the estate tax, estate tax returns for estates of decedents dying in 2010 will be due within 9 months after December 17, 2010 (ordinarily, such returns are due 9 months after the decedent's date of death).

                        3.         Gift Tax Achieves Unification.  The gift tax exemption is again unified with the estate tax exemption and is increased to $5,000,000.  Under current law, each individual has a lifetime exemption from the Federal gift tax (the "gift tax") of $1,000,000.  Under the new law, the main change with respect to the gift tax is that as of 2011 the gift tax lifetime exemption amount is "unified" with the estate tax exemption, meaning that the amount of the gift tax exemption increases from $1,000,000 to $5,000,000. 

                        4.         Payroll Tax Cut.  The law includes a temporary employee payroll cut for 2011 which would provide a payroll/self-employment for 2011.  The Social Security tax on wages earned up to $106,800 would be reduced from 6.2% to 4.2%, and the Social Security tax that self-employed individuals pay would be reduced from 12.4% to 10.4%.

                        5.         Business Tax Benefits.  Several tax relief provisions are extended through 2011, including the following:

• Work Opportunity Tax Credit
• Empowerment Zones
• District of Columbia Enterprise Zones
• Indian Employment Credit
• R&D Credit
• New Markets Tax Credit

                        6.         Business Receive a 100% Write-off.  Businesses may deduct 100 percent of new equipment business investments in 2011.

                        7.         Unemployment.  The new law extends unemployment benefits for the next 13 months.

                        8.         Two Year AMT Patch.  An alternative minimum tax patch is retroactively enacted for 2010 and extends through 2011.

                        9.         Disaster Benefits.  The disaster relief provisions are extended through 2011.

                        10.       Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011.  The following tax breaks for individuals are retroactively reinstated or extended:

• $250 above-the-line deduction for certain expenses of elementary and secondary
• school teachers is extended through 2011;
• 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 is extended through 2011;
• $1,000 child tax credit is expanded through 2012;
• higher education tax credit (the American Opportunity tax credit) is extended through 2012;
• expanded dependent care credit is extended through 2012;
• expanded adoption credit (but not refundability) is extended through 2012;
• increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes is extended through 2011;
• above-the-line deduction for qualified tuition and related expenses is extended through 2011;
• provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010) is extended through 2011;
• student loan deduction rules are extended through 2012;
• deduction for mortgage insurance premiums for a qualified residence interest; and
• the Section 1202 exclusion of 100% of gain on Qualified Small Business Stock.