Sun Setting Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001

8/8/2019 Sun Setting Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001

1/12

Special Repor

CCH Tax Briefing

September 13, 2010

Sunsetting Benefits of the Economic Growthand Tax Relief Reconciliation Act of 2001

Sunset Of EGTRRAIndividual Rate Cuts

Expiration Of MarriagePenalty Relief

Reinstated Itemized

Deduction/PersonalExemption Phaseouts

Reduced Child Tax Credit

End Of Lower Capital Gains/Dividends Rates

Reduced Code Sec. 179Expensing

Sunset Of EnhancedEducation Tax Incentives

Revived Federal Estate TaxExpiration of GST TaxReforms

And More

INSIDESunsets Facing Individuals ..................... 1

Income Tax Rates for Individuals ..... 1Child Tax Credit.................................. 4

AMT Exemption Amounts ................5Capital Gains and Investment Sunsets .....6

Capital Gains Ratesfor Individuals ............................... . 6

Dividend Income of Individuals ...... 6Expensing for Small Business .......... 8

Education Sunsets ............................ ...... 8Federal Estate, Gift and GST Sunsets .... 9

Estate and Gift Tax Rates ................. 9Estate and Gift Tax Exemption

Amounts ............................... ......... 10

HIGHLIGHTSEGTRRA SUNSET BRINGS

NEW CHALLENGES TO PLANNING

FOR 2011

ime is almost up or the historictax cuts enacted by the EconomicGrowth and ax Relie Reconcilia-

tion Act o 2001 (EGRRA). Without anyCongressional action, many popular taxcuts automatically disappear (sunset) aterDecember 31, 2010. Tey will be replacedby rates, deductions, credits and other pro-visions based on the ar less generous lawin place beore EGRRA. Additionally,enhanced capital gains and dividends taxrates in the Jobs and Growth ax RelieReconciliation Act o 2003 (JGRRA) andsubsequent legislation will also sunset aterDecember 31, 2010. Tis CCH ax Brie-

ing alerts tax practitioners and their clients towhat the ax Code is scheduled to look likeater EGRRAs and JGRRAs tax beneftssunset ater December 31, 2010.

IMPACT. While individual, capital gains/dividends and estate tax rate cuts remainthe ocus o the expiring tax cuts and arethe most likely provisions to get Congressattention this Fall, EGRRA made over50 other major changes to the ax Codethat will also sunset. Congress may ig-nore them entirely, or re-evaluate each

on a case-by-case basis. Other EGRRAchanges, notably its sizeable package opension reorm measures, were spared thesunset ax by the Pension Protection Act o2006 and subsequent legislation.

COMMENT. It appears the House islooking to the Senate to take the lead onextending EGRRA. Te Senate, how-ever, is hampered by its supermajorityrules, which require 60 votes to deeatany flibuster and pass a bill. Te Sen-

ate may seek a compromise and extendthe EGRRA tax cuts or one or two years, rather than permanently. Te

timeline or Senate action is also uncer-tain. On September 8, Senate MajorityLeader Harry Reid, D-Nevada, said heis committed to holding a lame-ducksession ater the November elections butdid not say what legislation he intendsto address.

SUNSETS FACING

INDIVIDUALS

EGRRA targeted tax relie to individuals through marginal tax rate reductionmarriage penalty relie, an increased childtax credit, and more. See also Capital Gainand Investment Sunsets and Estate ax Sunsets in this Briefng or additional provisionaecting individuals.

Income Tax Rates for Individuals

Regular income tax liability is determinedby applying the regular income tax rateschedules to the individuals taxable income

Te rate schedules are divided into rangeo income, known as income brackets, andvary or single flers, married taxpayers flingseparately, joint flers, heads o householdsand estates and trusts. Te marginal tax rateincreases as the taxpayers income increases.

Beore EGRRA, the individual marginaincome tax rates were 15, 28, 31, 36, and39.6 percent. EGRRA gradually reducedthe individual marginal income tax rates (accelerated by JGRRA). For 2010, the indi


2/12CCH Tax Briefing 2010 CCH. All Rights Reserve

2

vidual marginal income tax rates are 10, 15,25, 28, 33, and 35 percent.

Under the sunset provision o EGRRA,amendments made by the Act will not ap-

ply to tax years beginning ater December31, 2010. Consequently, the individualmarginal tax rates will revert to 15, 28, 31,36, and 39.6 percent eective or tax yearsbeginning ater December 31, 2010.

10 Percent Rate. EGRRA created a newbracket, the 10 percent tax rate, or a por-tion o individual income previously taxedat 15 percent. Ater December 31, 2010, the10 percent rate will disappear and the frstportion o taxable income or all taxpayersthereore will again be taxed at 15 percent.

IMPACT. EGRRA made across theboard rate reductions but its greatestbeneft was to taxpayers in the top twoincome brackets. Ater 2010, higher-income taxpayers not only are scheduledto be subject to higher marginal incometax rates, they also, eective or tax yearsater December 31, 2012, will be subjectto an additional 0.9 percent Medicaretax on earned income above $200,000($250,000 or married couples fling a

joint return) and a 3.8 percent Medi-care tax on the lesser o the individualsnet investment income or the tax yearor modifed AGI in excess o $200,000($250,000 or married couples fling ajoint return).

IMPACT. Individuals expecting to besubject to a higher income tax rate ater2010 should explore the timing o incomeor deductible expenses. Deerring deduc-tions into 2011 may help to oset incomethat would be subject to a higher rate o

taxation. Accelerating income into 2010likewise might lower overall tax liability. Acceleration techniques include billingearlier, selling appreciated property, avoid-ing installment sales that deer gain, andaccelerating bonuses. Converting to a RothIRA in 2010 also gives the taxpayer theoption o recognizing the conversion in-come in 2010 or pro-rata over 2011 and2012 under existing rules.

IMPACT. axpayers doing business as anS corp may be motivated to convert to aC corp in response to the rate increases,since the highest corporate tax rate re-mains at 35 percent. However, taxpay-

ers should keep in mind the expected in-crease in dividend tax rates ater 2010.Additionally, ater an S corp converts toa C corp, it generally cannot switch backto being an S corp or the next fve years.

COMMENT. President Obama has proposed to make permanent the 10, 15, 25, and 28 percent rates or tax yearsbeginning ater December 31, 2010but allow the 33 and 35 percent ratesto sunset as scheduled. Te president hasalso proposed to widen the tax bracketor the 28 percent rate so that individu-

als with less than $195,550 o taxableincome in 2011 ($200,000 o AGI, as-suming one personal exemption and thebasic standard deduction, indexed orination rom 2009), would not be sub-ject to the 36 percent rate. For marriedcouples fling a joint return, the dollarthreshold or the 36 percent rate wouldbe set at approximately $237,300.

COMMENT.Although the tax rates arescheduled to revert to the levels in placein 2001 prior to EGRRA, the bracket

amounts to which each rate is appliedwill continue to reect annual inationadjustments. Unlike some other EG-RRA sunset dollar amounts, those in-ation adjustments are required underthe pre-EGRRA, EGRRA and post-EGRRA versions o the ax Code.

IMPACT. By ar the costliest provision toextend is the reduced individual taxes.

According to the Congressional BudgetO ce (CBO), they account or over 50percent o the total revenue loss.

Itemized Deduction Phaseout forHigher-Income Taxpayers

he limitation on itemized deduction(called the Pease limitation ater thename o the member o Congress whosponsored the legislation enacting thelimitation) reduces the total amount oa higher-income taxpayers otherwise allowable itemized deductions. Howevercertain items, such as medical expensesinvestment interest, and casualty, theor wagering losses, are excluded.

Under EGRRA, the limitation on itemized deductions was gradually repealedstarting in 2006. For 2010, the limitationon itemized deductions is entirely repealed

Te limitation threshold amount, $100,000or most taxpayers and $50,000 or marriedtaxpayers fling separate returns, was set in1991, adjusted annually or ination.

Under the sunset provision o EGRRA

the limitation on itemized deductions wilbe reinstated in ull or tax years beginningater December 31, 2010.

IMPACT. Higher-income taxpayers whoanticipate being subject to the limita-tion on itemized deductions ater 2010may want to explore the value o shit-ing some o their itemized deductionsto 2010 by accelerating payment o de-ductible expenses beore year-end. Inaccelerating deductions to avoid theitemized deduction limitation, howev-

er, those anticipating being in a higherrate bracket in 2011 should weigh care- ully the benefts o getting a reduceddeduction that osets income taxed ata higher rate in 2011 against a ull de-duction that osets income taxed at alower rate in 2010.

COMMENT. President Obama has pro-posed to modiy the limitation on item-

EGTRRA made across the

board rate reductions but

its greatest benefit was to

taxpayers in the top two

income brackets.


3/12CCH Tax Briefin

September 13, 2010

ized deductions or tax years beginningater December 31, 2010, to only startbeyond the $200,000 level ($250,000 or joint flers). Future years would beadjusted or ination.

Personal Exemption Phaseout forHigher-Income Taxpayers

he personal exemption phaseout (PEP)reduces or eliminates the deduction orpersonal exemptions or taxpayers withincomes over certain thresholds. hetotal amount o exemptions that maybe claimed by a taxpayer is reduced bytwo percent or each $2,500 or portionthereo (two percent or each $1,250 or

married couples iling separate returns)by which the taxpayers AGI exceeds theapplicable threshold.

Under EGRRA, the personal exemptionphaseout was gradually repealed starting in2006. For 2010, the personal exemptionphaseout is entirely repealed.

Under the sunset provision o EGRRA,the personal exemption phaseout will be re-instated in ull or tax years beginning ater

December 31, 2010.

COMMENT.As in the case othe itemized deduction lim-itation, President Obamahas proposed to modiythe limitation on personalexemptions or tax yearsbeginning ater December31, 2010, to only start beyond the $200,000 level($250,000 or joint flers),adjusted or ination.

Standard Deductionfor Married CouplesFiling a Joint Return

Non-itemizers may takethe basic standard de-duction (and additionalstandard deductions i ap-

plicable), which is subtracted rom AGIto calculate taxable income. Prior to EG-RRA, the basic standard deduction or2001 or a single individual was 60 per-cent o the basic standard deduction or

married couples fling a joint return.

Under EGRRA, the basic standard deduc-tion or a married couple fling a joint returngradually increased to twice the basic stan-dard deduction or an unmarried individualfling a single return. For 2010, the standarddeduction or joint returns as a percentage othe standard deduction or single returns is200 percent.

Under the sunset provision o EGRRA,amendments made by the Act will not ap-

ply to tax years beginning ater December31, 2010. Consequently, the increased ba-sic standard deduction at 200 percent othe amount allowed or an unmarried in-dividual fling a single return will not beavailable to a married couple fling a jointreturn ater 2010.

COMMENT. Married individuals fl-ing joint return are entitled to a stan-dard deduction o $11,400 in 2010,however i the EGRRA sunset takes

eect, the basic standard deduction or2011 can be expected to drop to some-where between $9,500 and $10,000or joint returns.

IMPACT. he gradual increase inthe basic standard deduction wasintended to ameliorate the so-calledmarriage penalty and its sunset ater2010 will revive the marriage penal-ty. A marriage penalty exists when thecombined tax liability o a marriedcouple iling a joint return is greaterthan the sum o the tax liabilities oeach individual computed as i theywere unmarried. Married couples maywant to explore increasing their with-holding or making larger estimated

tax payments in 2011 to avoid anyadverse impact rom the sunset o theincreased standard deduction or mar-ried couples.

COMMENT. President Obama has proposed to permanently increase the basicstandard deduction or a married couple fling a joint return to twice the basicstandard deduction or an unmarried in-dividual fling a single return, irrespectiveo income level.

COMPARISON OF INDIVIDUAL INCOME TAX RATES

5

10

15

20

25

30

35

40

45

Rate

10 10

2825

28 25

3128

3128

36

3336 36

39.6

35

39.6 39.6

Pre-EGTRRA Obama

Proposed 2011

EGTRRA Sunset 20112010

15 15 15 15

* President Obama would expand the 28% bracket by starting the 36% bracket at a projected $195,550 taxableincome ($237,300 for joint filers and surviving spouse) rather than at a projected $176,146 and $214,481, respec-tively, under EGTRRA sunset.



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15 Percent Income Tax Bracketfor Married Couples Filing aJoint Return

o remove the marriage penalty, the size

o the 15 percent regular income tax ratebracket or a married couple fling a jointreturn gradually increased under EGRRAand subsequent legislation to twice the sizeo the corresponding rate bracket or anunmarried individual fling a single return.For 2010, as ully phased-in, the end pointo the 15 percent rate bracket or a marriedcouple fling a joint return as a percentage othe end point o the 15 percent rate bracketor an unmarried individual fling a singlereturn is 200 percent.

Under the sunset provision o EGRRA, e-ective or tax years beginning ater Decem-ber 31, 2010, the 15 percent regular incometax rate bracket or a married couple flinga joint return will return to being less thanthe combined 15 percent regular income taxrate brackets o two unmarried individualsfling single returns.

COMMENT. President Obama has pro-posed permanently increasing the size othe 15 percent regular income tax rate

bracket or a married couple fling a jointreturn to twice the 15 percent regular in-come tax bracket or an unmarried indi-vidual fling a single return.

Earned Income Credit

Qualifed individuals with earned incomemay claim a reundable earned income cred-it (EIC). Te amount o the EIC reects thetaxpayers income and the number, i any, oqualiying children.

Under EGRRA, the beginning and endpoints o the earned income credit phaseoutwere gradually increased or married couplesfling a joint return over and above annualination adjustments. EGRRA also sim-plifed the defnition o earned income,eliminated the rule that reduced a taxpayersEIC by the amount o alternative minimumtax (AM) liability, reormed the relation-ship test, modifed the tie-breaking rule, and

gave the IRS additional math error author-ity. Te Working Families ax Relie Act o2004 (WFRA) and the American Recoveryand Reinvestment Act o 2009 (2009 Re-covery Act) urther enhanced the credit but

both retained EGRRAs sunset schedule.

Under the sunset provision o EGRRA,the enhancements to the EIC will disappearater 2010.

COMMENT. In August 2010, PresidentObama signed legislation (P.L. 111-226)abolishing the advance payment option or the EIC. EGRRAs sunset does notrevive the advance EIC.

IMPACT. Some taxpayers also may experi-

ence a marriage penalty in the EIC ater2010. Generally, this may occur becausethe EIC is based on earned income andnumbers o qualiying children and noton marital status.

COMMENT. President Obama has pro-posed to permanently extend EGRRAsenhancements to the EIC or tax yearsbeginning ater December 31, 2010. Tepresident has not indicated i he endorsesextending the enhancements to the EIC

under the 2009 Recovery Act.

Child Tax Credit

A taxpayer may claim a tax credit or eachqualiying child. Te qualiying child mustbe under age 17 at the close o the year andsatisy relationship, residency, support, citi-zenship and dependent tests.

Under EGRRA, the child tax credit grad-ually increased in amount ($1,000 or the2010 tax year). EGRRA also modifed the

reundable component, provided that thereundable portion o the child tax creditdoes not constitute income, provided thatthe child tax credit is allowable against reg-ular income tax and, or tax years beginningbeore January 1, 2011, allowable againstAM, repealed the AM oset against theadditional child tax credit or amilies withthree or more children, and eliminated thesupplemental child tax credit.

Under the sunset provision o EGRRAthe child tax credit will revert to $500 perqualiying child. In addition, the other EGRRA enhancements to the child tax crediwill expire ater 2010.

IMPACT. Te at $500 amount,which was in place beore EGRRA,is not adjusted annually or ination. Also unadjusted or ination are theincome levels beyond which the creditis reduced or eliminated. Te child taxcredit is reduced and phased out when ataxpayers modifed AGI reaches certainthresholds. Tose thresholds remain at$110,000 or joint flers and $75,000or others.

COMMENT. President Obama has pro-posed permanently extending the $1,000child tax credit or tax years beginningater December 31, 2010. Additionally,the president has proposed permanentlyextending the modifed reundable component, the allowance o the child taxcredit against regular income tax andAM, the rule that the reundable por-tion o the child tax credit does not con-stitute income, the repeal o the AMoset against the additional child tax

credit or amilies with three or morechildren, and elimination o the supple-mental child tax credit or tax years be-ginning ater 2010.

Dependent Care Credit

Te dependent care credit applies to expenses paid or the care o a qualiyingindividual to enable the taxpayer to begainully employed. Te dependent carecredit is a percentage o employment-related expenses and is limited by the tax

payers AGI.

Under EGRRA, the maximum amouno eligible employment-related expenseincreased rom $2,400 to $3,000 (in thecase o one qualiying individual) and rom$4,800 to $6,000 (in the case o two omore qualiying individuals) or tax yearbeginning beore January 1, 2011. EG-RRA also raised the maximum credi


5/12CCH Tax Briefin

September 13, 2010

rom 30 to 35 percent and provided or areduction in the credit, but not below 20percent, by one percentage point or each$2,000, or raction thereo, o AGI above athreshold amount ($28,000).

Under the sunset provisions o EGRRA,the maximum amount o employment-related expenses will decrease rom$3,000 to $2,400 (in the case o onequaliying individual) and rom $6,000to $4,800 (in the case o two or morequaliying individuals). here will be noadjustment or inlation since 2001. hemaximum credit will also decline, rom35 to 30 percent.

Adoption Creditaxpayers who incur qualifed adoptionexpenses may be eligible or the adoptioncredit or an exclusion rom income or em-ployer provided adoption assistance.

Under EGRRA, the maximum adoptioncredit and the exclusion rom income oemployer-provided adoption assistance in-creased rom $5,000 to $10,000 (indexedor ination) or each eligible child, in-cluding a child with special needs. In the

case o a special needs child, EGRRAallowed $10,000 (rather than $6,000) (in-dexed or ination) as an adoption creditand as an exclusion rom income, regard-less o whether the taxpayer has qualifedadoption expenses.

Te Patient Protection and AordableCare Act (PPACA) increased the dollarlimitation or the adoption credit andincome exclusion or employer-paid oremployer-reimbursed adoption expensesthrough a qualifed adoption assistance

program by $1,000 to $13,170 per eligiblechild (including a special needs child) or2010 and 2011. Additionally, the adop-tion credit has been made reundable un-der the PPACA or 2010 and 2011.

COMMENT. President Obama has proposed permanently extending theadoption credit and the exclusion romincome o employer-provided adoption

assistance at 2010 levels, rather thanrevert to the pre-EGRRA $5,000 gen-eral level (adjusted or ination). Ad-ditionally, the president has proposed tomake permanent the reundability o the

adoption credit.

AMT Exemption Amounts

Te Internal Revenue Code imposes analternative minimum tax (AM) on tax-payers to the extent that tentative tax ex-ceeds regular tax. A certain amount o ataxpayers alternative minimum taxableincome (AMI) is exempt rom the AMtax rates.

Under EGRRA, the exemption amounts

increased or unmarried individuals flinga single return, married couples fling ajoint return, married couples fling a sepa-rate return, and surviving spouses. Te in-creased exemption amounts were availableor tax years beginning ater December 31,

2000 and beore January 1, 2005. In sub-sequent years, including 2009, Congresenacted temporary AM patches withincreased exemption amounts or unmarried individuals fling a single return, mar

ried couples fling a joint return, marriedcouples fling a separate return, and sur-viving spouses.

COMMENT. Te AM patches also al-lowed the nonreundable personal creditsto the ull amount o the individualsregular tax and AM.

IMPACT. Unless Congress enacts an AM patch or 2010, the exemptionamounts or 2010 and again or 2011are $33,750 or unmarried individuals

fling a single return, $45,000 or mar-ried couples fling a joint return andsurviving spouses, and $22,500 or mar-ried individuals fling a separate return.Te exemption amounts or 2009 were$46,700 or unmarried individuals fl-

IMPACT OF SUNSETSILLUSTRATIONS#1: Assume a couple, two children eligable or the child tax credit, fling a jointreturn and taking the standard deduction, with $130K wage income, $10,000 netcapital gains, and $2,000 dividend income. Teir tax liability or 2011 (all fgures areestimates and, or illustration, assume no ination adjustments or 2011 rom 2010bracket amounts):

No sunset: $19,513 tax due for 2011Sunset: $26,343 tax due for 2011Obama modifed sunset: $19,513 tax due for 2011

#2:Assume a couple, no children, fling a joint return and taking the standard de-duction, with $300K wage income, $50,000 net capital gains, and $5,000 dividendincome. Teir tax liability or 2011 (assuming or illustration, no ination adjust-ments or 2011 rom 2010 bracket amounts):

No sunset: $78,860 tax due for 2011Sunset: $91,789 tax due for 2011

Obama modifed sunset: $84,011 tax due for 2011

#3:Assume a single fler, no children, taking the standard deduction, with $70Kwage income, $5,000 net capital gains, and $1,000 dividend income. Te individualstax liability or 2011 (assuming or illustration, no ination adjustments or 2011rom 2010 bracket amounts):

No sunset: $12,244 tax due for 2011Sunset: $13,842 tax due for 2011Obama modifed sunset: $12,244 tax due for 2011



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ing a single return, $70,950 or marriedcouples fling a joint return and survivingspouses, and $35,475 or married couplesfling a separate return.

CAPITAL GAINS AND

INVESTMENT SUNSETS

Capital Gains Rates for Individuals

Any gain or loss on the sale o a capital assetis generally included in income. Te axCode provides dierent tax rates or varioustypes o capital gains.

Under JGRRA, starting in 2003, andenhanced and extended by the ax In-

crease Prevention and Reconciliation Acto 2005 (IPRA), the maximum rate otax on the adjusted net capital gain o anindividual has been set at a reduced rateo 15 percent or tax years beginning be-ore January 1, 2011 or both regular taxand AM. JGRRA also provided or afve percent rate (subsequently reduced tozero) or taxpayers in the 10 and 15 per-cent tax brackets.

Under the sunset provisions o JGRRA

and IPRA, the maximum rate o tax onthe adjusted capital gain o an individualwill revert to 20 percent (except 18 percentor gains on assets held over fve years) andthe zero percent rate will disappear, replacedwith a 10 percent rate (except eight percentor gains on assets held over fve years).

IMPACT. Te JGRRA/IPRA ex-tension through December 31, 2010aligned the capital gains (and dividends)tax rate cuts with EGRRAs income taxrate cuts so that they share the same sun-

set date and require coordinated eortto plan income recognition accordingly.Post-2012, planning will be urthercomplicated by the 3.8 percent unearnedincome Medicare contribution tax, to beimposed on net investment income abovecertain amounts.

IMPACT. Individuals should considerthe benefts o accelerating capital gains

into 2010 while the rates may be lower.Accelerating the sale o capital assets isthe general strategy available to acceler-ate gain. As long as the sale is bona fdeand the proceeds are received in 2010,

capital gains can be accelerated. Un-like the wash sale rules that require asale or loss purposes not to be ollowedwithin a certain number o days by re-acquisition o the same shares o stock,reacquiring the shares in the same cor-poration at any time is allowed i gainis realized, thereby legitimately preserv-ing the investors position in the marketunder this strategy.

CAUTION. Installment payments re-ceived ater 2010 are subject to the tax

rates or the year o the payment, notthe year o the sale. hus, the capital gains portion o payments made in2011 and ater would be taxed at the 20 percent rate or taxpayers in thehigher income levels.

COMMENT. President Obama has pro-posed permanently extending the 15 andzero percent capital gains tax rates or ev-eryone except taxpayers in the two highestincome tax rate brackets. For those tax-

payers, he recommends that the 15 per-cent capital gains rate sunset in avor o a20 percent rate.

IMPACT. A permanent extension othe zero percent rate on adjusted capi-tal gain o an individual is unlikely tostimulate signifcant investment. Indi-viduals in the aected tax rate brackets(currently the 10 and 15 percent ratebrackets) are generally not signifcantinvestors in capital assets.

COMMENT. Te current 28 and 25percent rates or collectibles and recap-tured 1250 gain, respectively, wouldcontinue unchanged.

Five-Year Holding Period or CapitalAssets. he time a taxpayer owns an as-set beore disposing o it is the holdingperiod. Under JGRRA and as extendedby IPRA, the special holding period

rule or capital assets held or more thanive years was eliminated. IPRA also repealed the 18 percent tax rate applicableor qualiied ive-year property (eighpercent or taxpayers in the 10 or 15 per

cent tax rate brackets).

Under the sunset provision o JGRRAand subsequent legislation, amendmentmade by the Act will not apply to tax yearbeginning ater December 31, 2010. Consequently, the special holding period ruleor capital assets held or more than fveyears will return along with the 18 percentax rate applicable or that property (eighpercent or taxpayers in the 10 or 15 per-cent tax rate brackets).

COMMENT. President Obama has proposed permanently repealing the specialholding period rule or capital assets held or more than fve years along with ex-tending the repeal o the applicable 18percent (eight percent) tax rate.

Dividend Income of Individuals

A dividend is the distribution o propertmade by a corporation to its shareholderout o its ater-tax earnings and profts.

Under JGRRA and as extended by IPRA, the maximum tax rate or qualifeddividends received by an individual wareduced to 15 percent or tax years beginning beore January 1, 2011. A zero percenrate applies to qualifed dividends receivedby an individual in the 10 or 15 percentincome tax rate brackets.

Under the sunset provisions o JGRRAand IPRA, qualifed dividends received byan individual or tax years beginning ate

December 31, 2010 will be taxed at ordinary income tax rates.

IMPACT. Unlike capital gains (taxedat a maximum tax rate o 20 percent pre-JGRRA), i Congress does notact, the tax rates on dividends wouldincrease substantially, to ordinary in-come rates that could be as high as39.6 percent.


7/12CCH Tax Briefin

September 13, 2010

IMPACT. Qualifed corporations maywant to explore accelerating dividends toshareholders beore January 1, 2011.

COMMENT. President Obama has

proposed permanently extending the 15and zero percent tax rates on qualifeddividends. In addition, the president hasproposed a 20 percent tax rate on qualifed dividends or unmarried individu-als fling a single return with AGI over$200,000 and or married couples flinga joint return with AGI above $250,000 or tax years beginning ater December31, 2010.

COMMENT. Only qualifed dividendshave been eligible or the reduced tax

rates. Generally, these are dividends re-ceived rom a domestic corporation or aqualifed oreign corporation, on whichthe underlying stock is held or at least 61days within a specifed 121-day period.

Small Business Stock

Non-corporate investors may exclude apercentage o the gain they realize on thesale or exchange o qualifed small businessstock. Generally, the stock must have been

issued ater a certain date by a qualifed Ccorporation and held by the taxpayer ormore than fve years.

Under JGRRA, seven percent (ratherthan 42 percent) o the excluded gain istreated as a tax preerence item subject tothe AM or tax years beginning beoreJanuary 1, 2011.

Under the sunset provision o JGRRA andsubsequent legislation, amendments madeby the Act will not apply to tax years begin-

ning ater December 31, 2010. Consequent-ly, the percentage o excluded gain treated asa tax preerence item subject to the AMwill increase rom seven to 42 percent.

COMMENT. o qualiy as small busi-ness stock, the stock must be issued bya C corporation that invests 80 percento its assets in the active conduct o atrade or business and that has assetso $50 million or less when the stockis issued.

COMMENT. Te 2009 Recovery Act al-lows investors to exclude 75 percent o the gain rom small business stock acquiredater February 17, 2009 and beore Jan-uary 1, 2011. President Obama has pro-

posed raising the exclusion to 100 percento the gain and to eliminate the AMpreerence item.

Other Dividend-Related Changes

Te ollowing changes are also scheduledto be made because o EGRRA and JG-RRA sunsets:

Mutual unds and REITs. Under JGRRA, dividends received rom a

regulated investment company (RIC),real estate investment trust (REI)and other qualifed pass-through enti-ties are qualifed dividends or purpos-es o the reduced tax rates (15 and zeropercent) or tax years beginning beore January 1, 2011. Under JGRRAssunset provision, qualifed dividendincome received rom a RIC, REIor other qualifed pass-through entityby an individual ater December 31,2010 will be taxed at ordinary incometax rates.

Collapsible corporations. Unde JGRRA, the collapsible corportion rules were repealed or tax yearsbeginning beore January 1, 2011JGRRAs sunset eectively reinstate

the pre-JGRRA collapsible corporation rules.Accumulated earnings tax. Te accumulated earnings tax imposed on corporations was reduced rom the highestax rate imposed on dividends distributed to individuals to 15 percent or taxyears beginning beore January 1, 2011Under the sunset provisions, the 15 percent tax rate on accumulated earning will disappear and accumulated earnings will be subject to the highest taxrate imposed on dividends distributed

to individuals.Personal holding companies. Te taxon undistributed personal holding company (PHC) income was reduced romthe highest individual tax rate to 15 percent. Under sunset provisions applicablto tax years beginning ater Decembe31, 2010, the 15 percent tax rate on undistributed personal holding companyincome will disappear and undistributedpersonal holding company income onceagain will be subject to the highest tax

rate imposed on individuals.

Alaska Native Settlement Trusts

Alaska Native Corporations (ANCs) caestablish settlement trusts to separate portolio assets o an ANC rom its business as-sets. EGRRA enhanced the tax treatmeno qualifed settlement trusts.

Under the sunset provision o EGRRAamendments made by the Act will not apply to tax years beginning ater December

SCHEDULE OF POTENTIAL TAX RATE INCREASES

2010 Sunset 2011 Obama 2011 Budget

Regular Income Tax 10%, 15%, 25%, 28%, 33%, 35% 15%, 28%, 31%, 36%, 39.6% 10%, 15%, 25%, 28%, 36%, 39.6%

Capital Gains 0%, 15% 10%, 20% 0%, 15%, 20%

Dividends 0%, 15% Regular Income tax rate, up to 39.6% 0%, 15%, 20%

Estate Tax 0% 55% / $1 million applicableexclusion amount

45% / $3.5 million applicableexclusion amount



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31, 2010. Te pre-EGRRA treatment oqualifed settlement trusts will return.

Tax Credit for Employer-

Provided Child Care Facilities

Employers that provide child care acilitiesmay be eligible or a tax credit.

Under EGRRA, employers may be eli-gible or a tax credit equal to 25 percento qualifed expenses or employee childcare and a tax credit equal to 10 percento qualifed expenses or child care resourceand reerral services. EGRRAs tax treat-ment is subject to a $150,000 cap or theapplicable tax year.

Under the sunset provision o EGRRAor tax years beginning ater December 31,2010, the tax credit or employer-providedchild care acilities will disappear.

IMPACT. Employers that terminate child-care services would have to recapture a por-tion o the credit. While employers wouldbe reluctant to eliminate child-care servic-es, they could seek to save money by spend-ing less or by charging employees more or

child-care services that they may be able tound, at least partially, through a pre-taxdependent care spending account.

COMMENT. President Obama has proposed permanently extending the taxcredit or employer-provided child careacilities or tax years beginning ater De-cember 31, 2010.

Expensing for Small Business

axpayers that purchase tangible depreciable

property can elect to deduct the cost o theproperty in the year it is placed in service,rather than take depreciation on the property.Te expensing amount is phased-out (but notbelow zero) by the amount by which the costo qualiying property placed in service dur-ing the tax year exceeds a threshold amount.

Under JGRRA and subsequent legisla-tion, the $25,000 expensing amount and

$200,000 threshold amount were repealed.In their place, JGRRA and subsequentlegislation provided or higher amounts andincluded o-the-shel computer sotwareas qualiying property. Te Hiring Incen-

tives to Restore Employment (HIRE) Acto 2010 increased the expensing amount to$250,000 and the threshold or reducingthe deduction to $800,000 or tax years be-ginning on or ater January 1, 2010 and onor beore December 31, 2010.

Under the sunset provision o JGRRAand subsequent legislation, amendmentsmade by the Act will not apply to tax yearsbeginning ater December 31, 2010. Con-sequently, the expensing amount will revertto $25,000 and the threshold amount to

$200,000, both not indexed or ination.

IMPACT.As the expensing and thresholdamounts increased each year in recent years, the benefts o expensing becameavailable to larger businesses, not justsmall businesses. Correspondingly, the sig-nifcant decrease in these amounts ater2010 will preclude many businesses romtaking advantage o Code Sec. 179 ex-pensing, even at the lower $25,000 level.

COMMENT.President Obama has proposed a permanent expensing amount o

$125,000 and a permanent phase-outthreshold amount o $500,000 or tax yearsbeginning ater December 31, 2010. Bothamounts would be indexed or ination.

EDUCATION SUNSETS

A number o education tax incentives are a-ected by the sunset o EGRRA.

Educational Assistance Programs

Employer-paid educational expenses aregenerally deductible by the employer andexcludable rom the gross income and wageso employees.

Under EGRRA, employers have beenable to deduct up to $5,250 annually orqualiying education expenses paid or on

behal o an employee through Decembe31, 2010. Te beneft is not taxable to theemployee. EGRRA expanded the scopeo coverage to both undergraduate andgraduate education.

Under the sunset provision o EGRRAthe entire exclusion or employer-providededucational assistanceand not just the expansion to cover graduate coursesdisappears ater December 31, 2010.

IMPACT. Ater the sunset, employer-paideducational assistance will be excludablerom gross income only i it qualifes un-der the more stringent working condition ringe rules. Under the ringe beneftrules, the employee must be able to meet

the business expense requirements thatcall or a direct relationship between thecourse and the employees current job.

Coverdell EducationSavings Accounts

A Coverdell Education Savings Accoun(ESA) is an account created to pay certainqualifed education expenses.

Under EGRRA, the maximum annuacontribution that can be made to a Coverdell ESA increased rom $500 to $2,000or tax years through December 31, 2010Te annual contribution limit phase-ouincreased or joint flers to eliminate anymarriage penalty. EGRRA also expandedthe scope o qualifed education expensesto include elementary and secondary education expenses, in addition to higher education expenses.

Under the sunset provision o EGRRA

the annual contribution limit to a Cov-erdell ESA reverts to $500 or tax yearsbeginning ater December 31, 2010, anddistributions rom a Coverdell ESA wilno longer be allowed to pay elementaryand secondary education expenses, apparently irrespective o when the unds werecontributed. Te modifed AGI phaseourange also returns to pre-EGRRA levelswithout ination adjustment.


9/12CCH Tax Briefin

September 13, 2010

IMPACT. axpayers with unused undsin Coverdell ESAs may want to explorerolling over these amounts into a 529 col-lege savings plan. EGRRAs taxpayer- riendly revisions to 529 plans, which

were scheduled to sunset ater December31, 2010, were made permanent by thePension Protection Act o 2006.

Student Loan Interest Deduction

Eligible taxpayers may deduct up to $2,500in student loan interest, above-the-line, ona qualifed student loan used to pay quali-fed educational expenses at an eligible in-stitution. Te $2,500 amount, however, isreduced as the taxpayers modifed adjustedgross income (AGI) rises and based on fl-

ing status.

Under EGRRA, the modifed AGI phase-out range or the student loan interest deduc-tion increased or tax years through Decem-ber 31, 2010. EGRRA also eliminated the60-month limitation that applied to limitthe number o months during which interestpaid on a student loan is deductible.

Under the sunset provision o EGRRA,the increased modifed AGI phaseout ranges

will no longer apply. Additionally, the 60-month limitation will be reinstated or taxyears beginning ater December 31, 2010.

IMPACT. Te reinstatement o the 60-month limitation means that taxpayerswill not be able to obtain a longer periodo deductions by consolidating loans orchanging payment schedules. With the re-instatement o the 60-month limitation,taxpayers who may take many years topay o their education loans are prevent-ed rom deducting the interest payments

or the ull term o their loan.

Deduction for HigherEducation Expenses

Te above-the-line deduction or high-er education expenses under EGRRAoriginally expired or tax years beginningater December 31, 2005. Te deduction

was extended by subsequent legislationthrough December 31, 2009. A maximumdeduction o either $4,000 or $2,000 wasallowed based upon modifed AGI limitsthat ranged rom $65,000 to $160,000,

depending on fling status.

COMMENT. Pending legislation (the American Jobs and Closing ax Loop-holes Act (H.R. 4213) and the ax Ex-tenders Act o 2009 (H.R. 4213)) wouldextend the deduction through December31, 2010.

Scholarships

A qualiied scholarship generally maybe excluded rom the recipients gross

income. EGRRA treats the NationalHealth Service Corps Scholarship Pro-gram (NHSCSP) and the Armed ForcesScholarship Program (AFSP) as qualiiedscholarships. Under the sunset provisionso EGRRA, the NHSCSP and the AFSPwill not be qualiied scholarships or taxyears ater December 31, 2010.

Bonds

Some enhancements to tax-exempt bonds

will terminate upon EGRRAs sunset:

School construction bonds. Underthe sunset provision o EGRRA, theamount o governmental bonds orpublic schools that small governmentalunits can issue in a calendar year start-ing in 2011 without being subject to thearbitrage rebate requirement decreasesrom $15 million to $10 million.

Exempt acility bonds. Under the sun-set provisions o EGRRA, exempt a-cility bonds cannot be used to fnance

the development and construction oqualifed public educational acilitiesater December 31, 2010.

FEDERAL ESTATE, GIFT

AND GST SUNSETS

Some o EGRRAs most extensive reorms were to the ederal estate, git and gener-

ation-skipping transer (GS) tax rulesEGRRA repeals the ederal estate tax buonly or decedents dying during calendayear 2010. Ater 2010, the pre-EGRRAestate tax provisions, with signifcantly

higher tax rates, are scheduled to return un-less Congress acts.

IMPACT. While the estate tax ended un-der EGRRA in 2010, that is not asunset provision, but rather is part o thegradual phaseout o the estate tax underEGRRA. What sunsets ater December31, 2010, is that phase out, with the es-tate tax regime returning to the way it hadbeen pre-EGRRA. Tis sunset includesnot only a return to the pre-EGRRA lev-els o rates and exemptions, but also im-

pacts over a dozen other estate tax changesinaugurated by EGRRA, or the 10-yearperiod that is now ending.

COMMENT. In December 2009, theHouse passed the Permanent Estate axRelie or Families, Farmers, and SmallBusinesses Bill (H.R. 4154), whichwould repeal the carryover basis at deathrules under EGRRA or decedents dy-ing on or ater January 1, 2010. TeHouse bill would permanently extend

the ederal estate tax at its 2009 param-eters (a top ederal estate tax rate o 45 percent and a $3.5 million exclusion($7 million or married couples whoully utilize their exclusions)).

Estate and Gift Tax Rates

Te ax Code traditionally applies a rateschedule or the taxation o estates and gits

Under EGRRA, the maximum ederal estate tax gradually declined rom 55 percen

to 45 percent, with the 45-percent rate ap-plicable to decedents dying in 2007, 2008and 2009. Te estate tax is repealed entirely or decedents dying in 2010. EGRRAalso gradually reduced the ederal git taxdown to a top marginal rate o 35 percenor gits made ater December 31, 2009.

Under the sunset provision o EGRRAthe maximum ederal estate tax rate revert



0

to 55 percent or decedents dying ater De-cember 31, 2010. Te maximum git taxrate also reverts to 55 percent.

COMMENT. Te House bill (H.R. 4154)

would provide or maximum ederal es-tate and git tax rates o 45 percent aterDecember 31, 2009.

COMMENT. EGRRA also repealed a fve-percent surtax on certain large estates, whichwill be restored ater EGRRAs sunset.

Estate and Gift TaxExemption Amounts

Te ax Code provides every decedent

a credit equal to the applicable creditamount in determining the amount o es-tate tax due. Te applicable credit amountoperates to exempt a specifed amount othe value o a decedents estate rom the es-tate tax. Tis exempted amount is reerredto as the applicable exclusion amount.Under EGRRA, the applicable exclusionamount or ederal estate tax purposes is$3.5 million or decedents dying during2009. EGRRA provides or a $1 mil-lion git tax exclusion beginning with gits

made in 2002.

Under the sunset provision o EGRRA,the applicable exclusion amount or de-cedents dying ater December 31, 2010returns to the pre-EGRRA fgure o $1million. Te applicable git tax exclusionamount will remain at $1 million.

IMPACT. Te $1 million applicable ex-clusion amount or decedents dying aterDecember 31, 2010, would not includean adjustment or ination. As a result,

the value o the applicable credit amountis signifcantly reduced rom its value un-der EGRRA.

Qualified Family OwnedBusiness Deduction

Pre-EGRRA, the ax Code provided adeduction rom the gross estates o indi-

viduals holding certain qualifed amily-owned business interests (QFOBIs). Teintent was to provide additional ederal es-tate tax relie or closely-held businesses.

EGRRA repealed the deduction or quali-fed amily-owned businesses interests ordecedents dying ater December 31, 2003.Under the sunset provision o EGRRA, thededuction or QFOBIs revives ater 2010.

COMMENT. An additional tax is imposedi certain recapture events occur within10 years o the decedents death and beorethe qualifed heirs death, including i thequalifed heir ceases to meet material par-ticipation requirements. Te additional taxcontinued to apply during the time that the

QFOBI deduction was repealed.

State Death Tax Credit

Te ax Code provides rules or the treat-ment o state death taxes paidgenerally,any estate, inheritance, legacy, or successiontaxes paid to any state or the District o Co-lumbia.

EGRRA changed the tax credit or statedeath taxes paid to a deduction or estates odecedents dying ater December 31, 2004.

Under the sunset provision o EGRRA,the state death tax deduction terminatesand the state death tax credit returns or theestates o decedents dying ater December31, 2010.

COMMENT. EGRRA also repealed acredit or state GS taxes imposed on aGS (other than a direct skip) occurringas a result o death. Te credit will be re-

stored or GS taxes paid to a state ol-lowing a GS (other than a direct skip)that occurs as a result o the death o anindividual ater December 31, 2010.

Reporting and Penalty Provisions

Under the EGRRA carryover basis ruleeective or decedents dying in 2010, theexecutor is permitted to increase the basio assets owned by the decedent. Each decedents estate may increase the basis o assettranserred by up to a total o $1.3 million An estate may increase the basis o assetpassing to a surviving spouse by an additional $3 million (or a total o $4.3 million).

Te executor makes the basis increase allo

cations on an inormation return (yet to bereleased by the IRS). I the executor ails tofle the inormation return by the prescribeddue date, a $10,000 penalty is imposed. Teexecutor is also required to provide a writtenstatement to each recipient o the decedentproperty included on the inormation return. Tere is a $50 penalty or each ailureto urnish such written statement.

Under the sunset provision o EGRRAthe reporting provisions or carryover basis

are eliminated ater December 31, 2010.

Income Tax Exclusion for Sale ofPrincipal Residence

A single individual generally may excludrom income up to $250,000 o gain($500,000 i married fling jointly) rom thesale or exchange o a qualifed principal residence i ownership and occupancy requirements are satisfed.

Under EGRRA, the income tax exclusiono gain rom the sale o a principal resi-dence is applicable to a decedents principal residence sold by the decedents estateapplicable to estates o decedents dying in2010. Under the sunset provision o EGRRA, the income tax exclusion or thesale o a principal residence will no longerbe applicable to a decedents principal residence sold by the decedents estate.

t

r

After 2010, the pre-EGTRRA

estate tax provisions,

with significantly higher

tax rates, are scheduled toreturn unless Congress acts.


11/12CCH Tax Briefin

September 13, 2010

Treatment of AppreciatedCarryover Basis Property toSatisfy Pecuniary Bequest

Te ax Code provides rules or recogni-tion o gain on appreciated carryover basisproperty transerred to satisy pecuniary be-quests. A pecuniary bequest is a bequest oa specifc dollar amount.

Under EGRRA, a decedents estate mustrecognize gain on the distribution, butthe gain is measured by the excess o theair market value o the property at thetime o distribution over the date o deathvalue, rather than the carryover basis othe property (applicable to estates o de-

cedents dying in 2010). Under the sun-set provision o EGRRA, the limitationon the recognition o gain on appreciatedcarryover basis property in satisaction oa pecuniary bequest no longer applies toestates o decedents dying ater December31, 2010.

Treatment of MiscellaneousProvisions under Carryover Basis

Various provisions o the ax Code areamended to reect the carryover basis re-gime in eect or 2010. Tese include theprovisions or certain transers o propertyby a U.S. person to a nonresident alien,the capital gains treatment o the sale ocertain inherited creative works o art, theimposition o private oundation rules onsplit-interest trusts, and the defnition othe term executor.

Under the sunset provision o EGRRA,the amended provisions revert to their pre-

EGRRA language.

Distance Requirements forQualified ConservationEasements

Under EGRRA, the estate tax exclusion

or a conservation easement contributionwas available or qualifed property locat-ed in the United States or in a U.S. pos-session. EGRRA repealed the prior rulethat the qualifed real property be located within 25 miles o a metropolitan area,national park or wilderness area or within10 miles o an Urban National Forest.Under the sunset provision o EGRRA,this geographical requirement returns.

Generation-Skipping Transfer

(GST) Tax Sunsets

Te generation-skipping transer (GS) taxacts in tandem with the estate tax to ensurethat the transer o wealth will be taxed ona generation-by-generation basis. Some sig-nifcant GS reorms will sunset ater De-cember 31, 2010:

Deemed and retroactive alloca-tions o GST exemptions.EGRRAsdeemed allocation rule applicable to

indirect skips, as well as the EG-RRA provision or retroactive alloca-tions, will disappear.Severing o trusts. Te ability to make aqualifed severance o a trust or GSpurposes will be eliminated.

Modifcation o valuation rules. EG-RRAs clarifcation o the date onwhich allocation o the GS exemptionbecomes fnal is technically eliminated.Substantial compliance and lateGST elections. Under EGRRA, re-lie is available or a transeror who

substantially complies with the rules

or allocating the GS exemptionEGRRA also allows transerors whoinadvertently ail to allocate GS ex-emption on a timely fled git tax re-turn to obtain an extension o time to

allocate GS exemption to a transeo property. Tis relie will not beavailable ater December 31, 2010.

Installment Payments

Te ederal estate tax liability generallymust be paid within nine months o thedecedents date o death. In the case o anestate that includes an interest in a closelyheld business, the time in which to pay theestate tax liability attributable to the inter-est may be extended up to 14 years payable

in installments. Tis installment paymenavailability is subject to certain limitationsincluding a requirement that there be an active trade or business.

Under EGRRA, the number o allowablepartners or shareholders o a closely-heldbusiness or purposes o the installmentpayment provisions is increased rom15 to 45. EGRRA also treats stock inqualiying lending and fnance businesseas stock in an active trade or business o

purposes o the election to pay estate taxesin installments. Additionally, EGRRAclarifed the installment payment ruleto provide that only the stock o holdingcompanies, not that o operating subsidiaries, must be non-readily tradable.

Under the sunset provision o EGRRA, thenumber o allowable partners or shareholders or purposes o the installment paymenprovisions reverts to 15, lending and fnancebusinesses are treated as passive activities, andthe amended non-readily tradable stock rule

reverts to its pre-EGRRA language.


12/12

Documents

Sun Setting Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001