Temporary Extension of Tax Relief
The Tax Act of 2010 extends current provisions due to expire at the end of 2010 for an additional two years through 2012. Provisions that have a different expiration date are so noted in applicable sections.
Individual Income-Tax Rates
The 10% bracket is temporarily extended through 2012.
This Tax Act extends the 25%, 28%, 33%, and 35% individual income-tax brackets through 2012.
The personal exemption phase-out. The Tax Act extends the repeal of the Personal Exemption Phase-Out (“PEP”) through 2012.
The itemized-deduction limitation. Generally, taxpayers itemize deductions if their total deductions are more than the standard deduction amount. Beginning in 1991 the amount of itemized deductions a taxpayer may claim had been reduced, to the extent the taxpayer’s AGI was above a certain amount–a limitation known as the “Pease limitation,” which was repealed for 2010. The Act extends the repeal of the Pease limitation though 2012.
Capital-Gain and Dividends
Capital-gain and dividend rates. For taxpayers below the 25% bracket, the capital-gain and dividends tax is zero percent. For those in the 25% bracket and above, the capital-gain and dividend rates are currently 15%. These rates will be extended through 2012.
Temporary Individual Alternative Minimum Tax (AMT) Relief
Two-year AMT patch. Previously a taxpayer received an exemption of $33,750 (individuals) and $45,000 (married filing jointly) under the AMT and nonrefundable personal credits against the AMT were not allowed. The Tax Act increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly). The Act also allows the nonrefundable personal credits against the AMT.
Temporary estate, gift, and generation-skipping transfer-tax relief. The prior law phased out the estate and generation-skipping transfer-taxes so that they were fully repealed in 2010, lowered the gift-tax rate to 35%, and increased the gift-tax exemption to $1 million for 2010. The Tax Act of 2010 sets the exemption at $5 million per person and $10 million per couple and sets the top tax rate of 35% for the estate, gift, and generation-skipping transfer taxes , through 2012. The exemption amount will be indexed beginning in 2012. The Tax Act is effective January 1, 2010, but allows an election to choose no estate tax and instead use modified carryover basis for estates arising on or after January 1, 2010, and before January 1, 2011. The Tax Act sets a $5 million generation-skipping transfer-tax exemption and zero percent rate for the 2010 year.
Portability of unused exemption. Under current law couples have to do complicated estate planning to claim their entire exemption. The Tax Act of 2010 allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The Tax Act is effective for estates of decedents dying after December 31, 2010.
Reunification. Prior to 2001 the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The 2001 Tax Act decoupled these systems, but the Tax Act of 2010 reunifies them for gifts made after December 31, 2010.
Individual Tax Relief
Deduction of state and local general sales taxes. The Tax Act extends for two years (through 2011) 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.
Extension of provision encouraging contributions of capital-gain real property for conservation purposes. The Tax Act extends for two years (through 2011) the increased contribution limits and carry-forward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.
Extension of tax-free distributions from individual retirement plans for charitable purposes. The Tax Act extends for two years (2010 through 2011) the provision that permits tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer, per taxable year. The bill allows individuals to make charitable transfers during January of 2011 and treat them as if made during 2010.
Basis adjustment to stock of S corporations making charitable contributions of property. For contributions made in taxable years beginning after December 31, 2009, and before January 1, 2012, the amount of the reduction in basis is the shareholder’s pro rata share of the fair-market value of the contributed property.
Extension of enhanced charitable deduction for contributions of food inventory. The Tax Act extends (for two years through 2011) the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory.
Extension of enhanced charitable deduction for contributions of book inventories to public schools. The Act extends through 2011 the provision allowing C corporations to claim an enhanced deduction for contributions of book inventory to public schools (kindergarten through grade 12).
Extension of enhanced charitable deduction for corporate contributions of computer equipment for educational purposes. The Act extends through 2011 the provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions.
Exclusion of small business capital-gain income. Generally, non-corporate taxpayers may exclude 50% of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009, and on or before September 27, 2010, the exclusion is increased to 75%. For stock acquired after September 27, 2010, and before January 1, 2011, the exclusion is 100% and the AMT preference item attributable for the sale is eliminated. Qualifying small-business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and meeting a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. The Act extends the 100% exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012, and held for more than five years.