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2010 Tax Relief Act -- An Early Holiday Gift for US Taxpayers

17 Jan 2011

On 17 December 2010, President Obama signed into law the controversial and much anticipated Tax Relief, Unemployment Insurance Reauthorisation, and Job Creation Act of 2010 (commonly referred to as the "2010 Tax Relief Act" or the "Act"). The Act prevents the sunset of many important and beneficial tax provisions (referred to as the "Bush-Era Tax Cuts") for US taxpayers. The Act also includes some important tax incentives intended to spur economic growth. US taxpayers, and especially businesses and "high-income" taxpayers, should rejoice from this early holiday gift. Taxand US examines the new act, its incentives and why this is a welcome relief for taxpayers and how they can all benefit.

Tax Incentives and Benefits for Businesses
The Act contains new tax incentives for businesses, among others, a 100% first-year write-off of qualifying property (generally property with a recovery period of 20 years or less) placed in service after 8 September 2010 and before 1 January 2012 (before 1 January 2013 for certain longer-lived and transportation property). The 50% bonus depreciation will continue through the end of 2012 (after 31 December 2012 and before 1 January 2014 for certain long-lived and transportation property). The research and development tax credit is extended for 2010 and through 31 December 2011.

The Act extends through 31 December 2011 several important renewable energy and fuel tax incentives for businesses involved in renewable energy projects. For example, the Act extends the income tax credit, excise tax credit and payment provisions for biodiesel and renewable diesel as well as the alternative fuel tax credit. The Act also authorises through 2011 the issuance of grants for specified energy property in lieu of credits.

Income Tax Relief for International Businesses.
Pursuant to the Subpart F income rules, certain income (i.e. dividends, interest, royalties, etc.) earned by CFCs is taxed currently to US shareholders even if such earnings have not been actually distributed. Under the look-thru provisions, certain dividends, interest, rents and royalties received by a related CFC may be excluded from current year income inclusion and deferred from US taxation. The look-thru treatment has been extended through 2011. The legislation also extends for two more years (tax years beginning before 2012) the exception from Subpart F income for income that is derived in the active conduct of a banking, financing, or similar business, or in the conduct of an insurance business. This provision is especially important for US banks and other domestic financial institutions.

Tax Relief for Individuals
In general and through 2012, long-term capital gains will continue to be taxed at a lower 15% tax rate for domestic, non-corporate taxpayers (reduced from 20% prior to the Bush-Era Tax Cuts). In order to qualify for the lower rate, a capital asset (other than collectibles) must be held for more than one year.

An important benefit for individuals is the extension of the preferential tax rate (15%) for qualified dividends. Qualified dividends include dividends from domestic corporations and certain qualified foreign corporations. Qualified foreign corporations include corporations organised in a U.S. possession, or eligible for treaty benefits under a convention between the US and a foreign country that contains an information exchange agreement. Without the extension of the Bush-Era Tax Cuts, dividends would have been considered ordinary income taxed at ordinary income tax rates (up to 39.6%).

The Act extends until 2012 the Bush-Era Tax Cuts applicable to individual taxpayers regardless of income. The maximum federal income tax rate remains at 35% (set to increase to 39.6% under prior law). The Act also provides for a reduction in 2011 of two percentage points on the employee's social security contributions (from 6.2% to 4.2%) up to wages of $106,800. The employer's share of the tax remains at 6.2% and no changes were made to the Medicare tax rates.

Estate and Gift Taxes
Finally, the Act includes the much anticipated pronouncement on the future and the past of US estate taxes. The Act provides that for 2011 and 2012, the maximum estate tax rate is reduced to 35% (from 45% in 2009 and from the 2001 level of 55%). The Act increases the amount of estate exempt from taxation to $5 million (from $3.5 million in 2009 and from the 2001 exemption of $1 million). For 2010, the Act allows for the estate to elect to apply the 2011 estate tax rules or the capital gain and carryover basis provisions in place for 2010.

The Act adds an important new provision allowing the portability of the estate tax exemption between spouses. The Act provides that any portion of the estate tax exemption that remains unused at the death of a spouse who dies after 31 December 2010 generally is available for use by the surviving spouse in addition to the surviving spouse's own estate tax exemption. A special election must be made on a timely filed estate tax return (including extensions) of the predeceased spouse to secure portability.

Taxand's Take

The 2010 Tax Relief Act brings much welcomed relief and certainty to US taxpayers for at least one more year in some cases, and two more years for many of the more controversial portions of the law. Of course, this only sets the stage to have a repeat performance of this debate during 2012, which coincides with the 2012 presidential elections. Thus, we will probably be hearing from the Congress and the White House on any number of proposals related to these provisions over the next two years and this will become a continuous topic of debate. In the mean time, taxpayers should make the most of this holiday gift and should evaluate how to take full advantage of these incentives and benefits.

Your Taxand contacts for further queries are:
Juan Carlos Ferrucho
T. +1 30 5704 6670

Ernie Perez
T. +1 30 5704 6720

Silvia Flores
T. +1 30 5704 6724

Taxand's Take Author