Thrailkill Harris Wood & Boswell PLC provides information of general interest. Information is presented in summary form and should not be construed as individual legal advice. Federal and State Tax Matters Legislative Developments Estate, Gift, and Generation-Skipping Transfer Tax. On December 17, 2010, the President signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Tax Relief Act”). The 2010 Tax Relief Act extends the Bush individual tax rates through December 31, 2012 and provides relief from higher estate tax and generation-skipping transfer tax rates and lower exemptions which were scheduled to take effect on January 1, 2011. The 2010 Tax Relief Act provides the following changes with respect to the Federal estate, gift and generation-skipping transfer tax: · The estate, gift and generation-skipping transfer taxes have a maximum tax rate of 35 percent on taxable transfers. · Each of these taxes has an exemption of $5,000,000. · The estate and gift tax exemptions are portable between spouses (if it is not used by a deceased spouse, it will be available or carryover to the surviving spouse). · These new rules are effective January 1, 2011, but are temporary and expire on December 31, 2012. · For estates of descendants dying in 2010, the estate may either elect to (i) utilize the $5,000,000 exemption and obtain a “step up” in the income tax basis of assets to their fair market values as of the date of death, or (ii) elect out of the estate tax regime for 2010 and used modified carryover basis rules for income tax purposes. Two of the more significant changes from prior law are unifying the estate and gift tax exemptions (for 2009, the gift exemption was $1,000,000 while the estate exemption was $3,500,000). Many states, including Tennessee, have a gift tax and an inheritance or estate tax with lower exemptions than under federal law. Income and Alternative Minimum Tax. The 2010 Tax Relief Act also made significant changes in the income tax and alternative minimum tax. The Bush era income tax rates are extended for two years, maintaining the maximum tax rates on dividends and capital gains at 15 percent. The 2010 Tax Relief Act also extends for two years the maximum individual income rate at 35 percent. Prior to this legislation, income tax rates were scheduled to return to a maximum rate of 39.6 percent for higher earners on January 1, 2011. Some of the other benefits of the 2010 Tax Relief Act are: · Prior to 2010, higher income taxpayers were subject to a phase out of personal exemptions claimed on their personal tax returns. This phase out has been repealed through December 31, 2012. · Higher income taxpayers were also subject to a phase out of their itemized deductions under prior law, which expired on December 31, 2009. The elimination of this phase out has been extended through December 31, 2012. · The Act extends the increase in the alternative minimum exemptions through 2011 to $47,450 for single taxpayers and $72,450 for married taxpayers to further limit the application of this tax to individual taxpayers. · The 2010 Tax Relief Act extends the state and local sales tax deduction, the deduction for charitable contributions of appreciated property for conservation purposes, and the deduction for charitable distributions from IRAs through December 31, 2011. Payroll Tax. The 2010 Tax Relief Act provides for a 2 percent payroll tax cut by reducing the non-Medicare portion of an employee’s social security tax. This reduction applies to both the employee’s social security tax and self-employment tax, but does not apply to the Medicare portion of the tax. This reduction applies only during 2011.
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