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General Tax Legislation

On Thursday, December 16, 2010, the President signed into law the most recent tax legislation “The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The following summarizes what we believe to be the most significant provisions of the plan.

  1. Ordinary Income Tax Rates – Those rates which have been in effect since 2001 will remain intact; at least through 2012. The rates had been set to revert to their pre 2001 rates with a maximum rate of 39.6%. The top individual rate will remain at 35%.
  2. Capital Gains/Dividends Tax Rates – The rates on long term capital gains and qualified dividends (generally, domestic corporation dividends) will remain at 15%. They had been scheduled to increase to 20%. In addition, for those in the 10% and 15% ($34,500 and $69,000 for individuals and joint filers, respectively) ordinary income tax bracket, the capital gains and ordinary dividend rate will continue at 0%.
  3. As you may be aware, middle and higher income taxpayers (AGI greater than $169,550) were subject to a reduction in permitted itemized deductions beginning in 2006. This reduction was gradually reduced to 0 in 2010. The new act will extend the “0 adjustment” through 2012.
  4. The marriage penalty was repealed by the 2006 act and was set to reemerge in 2011. The new act continues the lessening of the marriage penalty by doubling the exemptions and tax brackets enjoyed by individuals to married couples.
  5. The Act also extends the following provisions through December 31, 2012:
    1. Dependent care credit eligible expenses continue at $3,000 per child.
    2. Continued deduction of Mortgage Insurance Premiums (subject to some limitations).
    3. American Opportunity Tax Credit (the former Hope Credit) for higher education expenses.
    4. State and local sales tax deduction (itemized deduction).
    5. Teacher classroom expense deduction.
    6. Charitable contribution of IRA proceeds.
    7. Charitable contribution of appreciated property for conservation purposes.
    8. An increased exemption under the Alternative Tax regime. Without the act the exemption would have fallen to $33,750 and $45,000 for single and joint returns, respectively.
  6. A new “payroll tax holiday” is in effect for 2011, whereby wage earners and self employed individuals will reduce their contribution to Social Security (FICA) to 4.2% from 6.2%.
  7. The Act increases the 50% bonus depreciation to 100% for qualified investments made before January 1, 2012, in other words, qualified property is entirely written off in the year of acquisition. The Act maintains the 50% bonus for property placed in service after December 31, 2011 through December 31, 2013. As of this writing we are still researching the definition of qualified investments, but believe it will be similar to that applicable to the current 50% standards.
  8. Extension of the energy efficient residential property credit through 2011, for qualified improvements to taxpayer residences. The total credit is limited to $1,500.
  9. Especially significant to us is the extension of two provisions specifically targeted to the GOZONE:
    1. Increased rehabilitation credit for historic structures within the GOZONE to 26% of qualified improvements. Improvements must be placed in service by 2012.
    2. Bonus depreciation for certain GOZONE property through 2011. We assume that this provision would dovetail with #7 above and apply to all property placed in service for original use within the GOZONE including traditional 27.5 and 39 year property.
  10. Congress has reached a compromise on the much debated estate and gift tax issues:
    1. Beginning with estates for decedents dying in 2011 the maximum tax rate will be 35% on estates greater than $5,000,000.
    2. There is also a “portability” provision allowing a surviving spouse to elect to take advantage of the unused portion of the estate tax applicable exclusion account of his or her predeceased spouse, thereby providing the surviving spouse with an even greater exemption at their death.
    3. The gift tax is reunited with the estate tax after 2010, meaning that there is no longer lifetime $1,000,000 gift exclusion. For 2011 forward, we are returning to a total transfer exemption of $5,000,000 whether by gift or estate.
    4. Please note that the above provisions are only extended through December 31, 2012.

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