On December 6th President Obama announced an agreement with Congressional Republicans on a two-year extension of the Bush tax rates and the extension of several other tax cuts. However, the House Democratic Caucus announced on December 9th that they would not support the tax cuts. The sticking point for the House Democratic Caucus is the proposal to increase the estate tax exemption to $5 million and lower the estate and gift tax rate to 35%. The political debate promises to continue and may well extend into January 2011 when the shift to a more Republican Congress will occur. The proposed Obama – GOP agreement includes the following:
- Extending the Income-Tax Rates for Two Years. The current income tax rates would be extended for two years, including the extension of the favorable 15% capital gain and dividend tax rate.
- Payroll Tax Cut. The agreement includes a one year payroll tax holiday by reducing the 6.2% social security rate to 4.2% for 2011 only. The holiday would also apply to self-employed persons. This payroll tax holiday would not reduce the employer’s payroll tax.
- Alternative Minimum Tax “Patch”. The AMT “patch” would increase the AMT exemption and allow certain personal credits, such as the child credit and education credits to reduce AMT. Without this patch, an estimated 21 million households would see their taxes increase in 2011.
- Estate Tax Relief. The agreement would increase the estate tax exemption to $5 million and reduce the tax rate to 35% for decedents dying in 2011 and 2012. This is a significant increase in the exemption and reduction in the tax rate.
- 100 Percent Expensing. The agreement allows ALL businesses a 100% bonus depreciation for qualified investments made between September 8, 2010 and the end of 2011.
- Research Tax Credit. The research tax credit had expired at the end of 2009. The agreement would extend the research tax credit to 2010 and 2011.
- Itemized Deduction Limitation. The limitation on itemized deductions would be delayed for two years. For higher income taxpayers, this limitation effectively increases the tax rate by more than one percentage point.
- Personal Exemption Phase-out. The phase-out of personal exemptions would be delayed two years for certain higher income taxpayers. Over the last several years, this phase-out has been reduced. Taxpayers who lose the benefit of their personal exemptions would have seen their taxes increase.
- Other Extenders. The state and local sales tax deduction, teacher’s classroom expense deduction, higher education tuition deduction and deduction for donations of conservative easements would be extended for two years.
- Marriage Penalty Relief. The plan would extend the marriage penalty relief for two years.
- Child Tax Credit. The child tax credit would stay at $1,000 per child and a portion would continue to be refundable for eligible taxpayers under the plan rather than being reduced to $500 per child and eliminating the refundable tax benefit.
- IRA Rollover to Charity. Before 2010, individuals over age 70-1/2 were able to contribute up to $100,000 directly from their IRA to charity. This would be extended to rollovers made in 2010 and through January 31, 2011.
- Extension of Unemployment Benefits. The agreement extends emergency unemployment benefits at their current level for 13 months, preventing an estimated 7 million workers from losing their benefits as they search for jobs.
- Earned Income Tax Credit. The expanded Earned Income Tax Credit would be extended for two years.
We will continue to monitor progress of this legislation and keep you informed. Please contact a member of HBK if you have any questions.
James M. (Jim) Rosa, CPA, PFS is the Principal in charge of the Tax Department at Hill, Barth & King LLC. Jim has worked as a CPA helping clients in Fort Myers, Cape Coral and other Southwest Florida communities for the last 23 years. He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1986.
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