Money Matters: Favorable law for the wealthy and the not so wealthy

By Heather Kmetz The Daily Record Newswire The definition of "wealthy" is a moving target -- especially over the last decade. Under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which was signed into law on Dec. 17, both the "wealthy" and "not so wealthy" may realize improved economic positions in the next two years. The package extends unemployment benefits, reduces the Social Security payroll tax for individuals and raises the threshold for the alternative minimum tax through 2011. Further, it extends the Bush-era tax cuts, increases transfer tax exemption amounts and reduces transfer tax rates through 2012. There are also new incentives to invest in machinery and equipment, and retroactively resuscitates and extends numerous tax breaks for individuals and businesses. The act replaces what was considered, by most measures, a relatively unpalatable set of laws scheduled to come into effect Jan. 1, 2011, and employs a shotgun approach -- something for everyone -- in hopes that the combination of law changes will provide meaningful net value to the national economy by the end of 2012. Here are some details concerning key elements of the act: Unemployment benefits, employment tax breaks and working family tax credits Federal unemployment benefits were extended 13 months, benefiting an estimated 7 million workers whose benefits were scheduled to expire. Employees and self-employed workers were given a 2 percent reduction of the Social Security tax, bringing the rate down from 6.2 percent to 4.2 percent for employees, and from 12.4 percent to 10.4 percent for the self-employed through 2011. Key tax credits for working families were extended through 2012, including the $1,000 child tax credit (which maintains its expanded refundability), and the American Opportunity tax credit for higher education, and its partial refundability. Extension of Bush-era tax cuts, AMT "patch" and charitable rollovers Favorable individual income, capital gains and dividend tax rates that were in effect in 2010 are now extended through 2012, thus retaining the 10 percent income tax bracket at the bottom and the 35 percent income tax bracket at the top. This two-year extension of favorable income tax rates provides planning opportunities for individuals who may consider accelerating future income into these two tax years or converting an IRA to a Roth IRA. For 2010 and 2011, there was a modest increase in the AMT exemption amounts and a number of personal nonrefundable credits are permitted offsets to AMT (as well as regular tax). Also, higher-income will no longer face previously scheduled reductions in itemized deductions and a phaseout of personal exemptions in 2011 and 2012. The IRA charitable rollover has been extended through 2012, allowing individuals age 70? and older to distribute up to $100,000 from the IRA directly to a public charity without reporting the distribution as income. Business benefit Businesses can write off 100 percent of new equipment and machinery purchases in the placed-in-service year, effective for items placed in service after Sept. 8, 2010 and through Dec. 31, 2011. For items placed in service in 2012, the new law provides for 50 percent additional first-year depreciation. The act also includes beneficial provisions aimed at energy-related businesses, including the extension of a program that provides cash payments in lieu of renewable energy tax credits. Unified gift and estate tax The federal estate tax exemption was raised to $5 million, the maximum estate tax rate was limited to 35 percent and beneficiaries' received a "stepped-up" basis in a decedent's assets. But that is helpful only for those who die in 2011 or 2012. More meaningful from a wealth transfer planning perspective was the reunification of the federal gift and estate tax credit. Since 2002, the lifetime gift tax exclusion amount was limited to $1 million; it is now $5 million. Understandably, individuals did not want to pay tax on lifetime transfers that would transfer free of tax if held until death. However, this retention of wealth increases their potential federal estate tax liability because of the included appreciation. Individuals now can give up to $5 million - $10 million for married couples - free of gift tax, and lifetime gift transfers totaling more than this amount in 2011 and 2012 will be subject to a federal gift tax of no more than 35 percent. Unused credit available to surviving spouse The act introduces "portability" of the newly reunified gift and estate tax exemption amount. Any unused amount attributable to a 2011 or 2012 decedent now can be used by the surviving spouse. If a decedent left all assets to a surviving spouse and did not have any planning to preserve the exemption amount or died with an estate of less than $5 million, the surviving spouse could transfer during lifetime or at death the decedent's unused amount (up to $5 million) plus the surviving spouse's remaining amount (as calculated under applicable law in the year of transfer -- up to $5 million in tax years 2011 and 2012). Additionally, the portability provision may enhance certain creditor protection planning through this two-year period, because spouses who have intentionally maintained separate assets need not be concerned that the estate tax exemption amount of a "poorer" spouse would be lost if such a spouse predeceased the "wealthier" spouse. The portability provision is not automatic; an election must be made on a timely filed federal estate tax return for the deceased spouse, even if the deceased spouse's estate value does not otherwise necessitate filing of a federal estate tax return. The 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act is a set of temporary tax policies negotiated between Republicans in Congress and the Obama administration. The act is designed to stimulate a tentative economic recovery, encourage business growth and sustained employment, and satisfy campaign promises. It also defers discussion of any comprehensive tax reform until 2012 -- promising an interesting presidential election year. Heather Kmetz is a partner in Sussman Shank LLP and is chairwoman of the firm's tax group. Contact her at 503-227-1111 or hkmetz@sussmanshank.com. Published: Tue, Feb 15, 2011