Introduction
In a deal between Republican and Democratic leaders, on December 17, 2010, the President signed “The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010”. It is important to all business people and many individuals. The new law is a compromise between two powerful political forces. One side called for the extension of unemployment benefits, the other side called for extension of the dividend and capital gains tax cuts enacted during the Bush administration. In the spirit of our democracy, the two desired outcomes were reached together with some new tax benefits.
Unemployment
Economists have predicted that in 2011, the unemployment rate will hover above 9%. With unemployment above 9% for 20 straight months and 42% of the unemployed being unemployed for 6 months or longer, Congress and the President realized the need for extended unemployment benefits. Without the extension, 2 million people would have had their unemployment benefits run out by the end of
December. Now, unemployment benefits have been extended until December 31, 2011.
The Bush Tax Cuts
A lot of attention has been focused lately on the Bush era tax cuts, which were set to expire at the end of 2010. Before the Bush Tax cuts were enacted, dividends from C corporations were taxed at the ordinary individual income tax rate. Capital Gains made by individuals selling appreciated property for at least the next two years were taxed, generally at 20%. Under the Bush tax cuts, dividends and capital gains are taxed lightly at 15%. This rate is set to continue.
The Estate Tax
As of 2010, the estate tax had been repealed. Anyone passing away in 2010, including the late owner of the New York Yankees, George Steinbrenner, was fully exempt from the estate tax. In 2011, the estate tax has been reenacted. Estates valued at $5 million or less will be completely estate tax free. The highest estate tax rate continues to be 35%. In addition, martial and bypass trusts used to be required to take advantage of a spouse’s exemption in the estate tax. It is no longer required to have a valid marital bypass trust anymore. The law allows you to automatically use a deceased spouse’s exemption to reduce your estate taxes when you die. These spouses have a total of $10 million potential between them.
Employment Taxes
In an attempt to stem unemployment, withholding taxes were lowered 2% from 6.2% to 4.2 % for employees for one year. Employers still pay 6.2%.
Other Business Cuts
Bonus depreciation has also been reenacted for purchased equipment placed in service between September 8, 2010 and before January 1, 2012. Equipment placed into service carries a 100% deduction instead of the 50% deduction. The Section 179 deduction was also expanded for 2011. The new limit is $500,000, the phase-out period being between $2,000,000 and $2,500,000. These companies can purchase up to $500,000 of equipment and get an immediate write-off on their tax returns.
Conclusion
The lawmakers of the United States have taken the high road in their tax legislation. Instead of allowing the tax laws to fall into default that would not have benefitted anyone, the Legislature and President have reworked the laws and created a relatively favorable environment for the taxpayers and businesses for the next two years.
While the tax utility of trusts may have been diminished under the new tax laws, it is also remarkable that legal utility remains in estate planning with the use of trusts. Some of the benefits are still present with trusts, i.e., who gets to manage the property and who gets the property from there. Without effective estate and business succession planning, many businesses still are in need to succeed to the next generation.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors