The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("2010 Tax Relief Act"), signed into law on December 17, 2010, provides individual and business tax relief that includes a two-year extension of capital gains and dividend income rate reductions, a two-year extension of individual income tax rate reductions and certain other individual and business tax relief. Additionally, the legislation increases the estate and gift tax exemption level to $5 million and reduces the tax rate to 35 percent through 2012.

This update summarizes business and individual tax provisions of the 2010 Tax Relief Act and provides general background information on the tax sections.

2010 Tax Relief Act Extends Individual Tax Relief Provisions. 2001 and 2003 individual tax rates set to expire as of December 31, 2010 are extended for two years, which means that the highest individual income tax rate will remain at 35 percent and the highest individual rate for capital gains and qualified dividends will remain at 15 percent through 2012. The legislation also extends certain other tax relief provisions, including the deduction for state and local sales tax, marriage penalty relief and modified alternative minimum tax relief. Additionally, the legislation adds a 2 percent reduction in the employee portion of the Social Security payroll tax rate for 2011; this reduces the employee Old Age, Survivors, and Disability Insurance ("OASDI") tax rate under the FICA tax to 4.2 percent and the OASDI tax rate for self-employed individuals to 10.4 percent for taxable years that begin in 2011.

2010 Tax Relief Act Expands Estate and Gift Tax Exemption, Reduces Rates and Adds Other Relief Provisions. Expansions to the estate and gift tax exemption levels that were set to expire as of December 31, 2010 are increased, and tax rates are reduced. Beginning in 2011 and effective through 2012, the exemption amount that can pass free of federal estate and gift taxes will be $5 million per person, and the applicable tax rate on the excess will be 35 percent. The legislation also extends certain other provisions enacted in 2010 and set to expire in 2011. Additionally, the legislation will permit spouses to utilize each other's exemption levels without the use of trusts, and it reinstates date-of-death adjustments to income tax basis, providing additional flexibility for the estates of some decedents dying in 2010. There remain limited opportunities that expire at the end of 2010 to make transfers to grandchildren and trusts for grandchildren at a reduced transfer tax cost.

2010 Tax Relief Act Extends Business Tax Relief Provisions. Business relief provisions set to expire as of December 31, 2010 are generally reinstated for 2010 through 2011, including the extension of the research credit, certain exclusions from subpart F income (such as the CFC look-through rule and active financing income exceptions) and 15-year depreciation for qualified leasehold improvements. Additionally, the legislation

  • Provides a 100 percent bonus depreciation for qualified property acquired after September 8, 2010 and before December 31, 2012 and placed in service prior to January 1, 2012 (and prior to January 1, 2014 for long-production period property and certain aircraft);
  • Extends the 50 percent bonus depreciation deduction for property acquired and placed in service prior to January 1, 2013 for qualified property (and prior to January 1, 2014 for long-production period property and certain aircraft) and, accordingly, extends a corporation's option to elect to accelerate alternative minimum tax credits in place of bonus depreciation for qualified property;
  • Extends the exclusion of 100 percent of the capital gains (subject to certain limitations) on noncorporate taxpayer investments in certain qualified small business stock made before January 1, 2012; and
  • Temporarily extends certain energy credits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.