After a day of posturing, the extension of the Bush-era tax cuts ended up passing easily last night, 277-148. The vote was held up to enable people to say how upset they were that they had to pass it, and for a vote to replace the bill's 35% estate tax and a $5 million exemption with a 45% tax and a $3.5 million exemption (which failed). The President is expected to sign the bill (UPDATE: Signed @3:17 pm Central. Thanks to Going Concern for the live link.).
So what does it do?
The Bush-era rates are extended through 2012. That means 35% top rates on ordinary income and 15% rates on dividends and capital gains.
The bill allows "bonus depreciation" of 100% of the costs of new business depreciable assets. Unlike "Section 179" depreciation, "bonus depreciation" only applies to new property -- not used machinery. The 100% bonus depreciation applies to new assets acquired after September 8, 2010 and placed in service starting September 9, 2010 through 2011 -- so it applies to many assets already placed in service. 50% bonus depreciation will again apply in 2012; then bonus depreciation is scheduled to go away.
And to answer the inevitable question: the maximum deduction for a new car will be limited to $11,060, as the bill doesn't change the maximum deduction for "luxury autos." Any remaining cost will be recovered under the usual limits of Code Sec. 280F in subsequent years.
- The bill has a $125,000 (inflation-adjusted) Section 179 deduction for otherwise-depreciable assets placed in service in 2012. Current law would reduce Section 179 to $25,000 in 2012; the limit is $500,000 for 2010 and 2011. Unlike bonus depreciation, the Sec. 179 deduction is also available for used assets.
The bill reimposes the estate tax with a 35% rate and a $5 million lifetime exclusion, retroactive to January 1 2010. The bill re-enacts the rule that resets the basis of inherited assets at their date-of-death value. It lets estates of 2010 decedents elect to use the rules that had been in place in 2010, with no estate tax but a limited step up in the basis of inherited assets.
The $5 million lifetime exclusion also applies now to gift tax, at least for 2011 and 2012. For a number of years, the gift tax lifetime exclusion was lower. It remains $1 million for 2010 gifts.
The $5 million estate tax exemption is also "portable." That means if a spouse dies after 2010 without using all of the $5 million exemption, the unused portion is added to the lifetime exemption of the surviving spouse. This would greatly simplify many estate plans, except all of these estate and gift tax rules are enacted only through 2012.
UPDATE: Estate planning attorney Wayne Reames e-mails:
As we think about it, portability is going to create more work, not less. First, portability only applies if the first-to-die files an estate tax return. Thus, we’ll have to file returns for all these people with less than $5M. Second, our documents will have to contemplate having a ported exemption (or not) and the effective de-couple of the GST with the Estate tax (because the GST doesn’t port).
So much for simplification.
An "AMT Patch" in the bill increases the AMT exemption amount through 2011. The 2010 exemption will be $47,450 for individuals and $72,450 for joint filers.
The bill reduces the employee FICA tax rate by 2 percentage points for 2011. The reduction will also apply to the FICA-base portion of self-employment tax. This will save employees up to $2,136 in Social Security taxes.
The bill extends most, but not all, of the perpetually-expiring tax breaks, including the ethanol and biodiesel subsidies. A few of the other items extended through 2011:
- R&D Credit
- 15 year depreciation for qualified leasehold improvements, restaurant improvements and retail improvements.
- Increased deduction limits for conservation easements.
- Work opportunity tax credits
- Tax breaks for energy saving appliances (but with tougher energy standards)
- The $250 above-the-line break for teachers.
- The economically-indispensable seven-year depreciation period for motorsports entertainment complexes.
You can find a complete list of these "extenders" here.
What does it mean for year-end planning?
- The usual rules apply: defer income, accelerate deductions. If the rates had been allowed to go up as scheduled, it would have worked the other way.
- AMT still matters. Don't prepay state and local taxes unless you know that you don't have AMT this year, or you just waste potential deductions.
- If you buy assets that qualify both for 100% bonus depreciation and Section 179, you normally will choose the bonus; there are fewer restrictions on the use of bonus depreciation, and unlike Section 179, it can generate net operating losses.
- Many states, including Iowa, will not adopt many of the changes in the bill. For example, don't expect Iowa to adopt bonus depreciation, or any of the extenders that they haven't signed on to already.
More coverage of the final bill:
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to