NAIFA GovWatch

Senate Passes Year-End Tax Bill, House Action on Tap

Issue: Federal Taxes

Date: December 15, 2010

Update: By a solid and bipartisan vote of 81-19, the U.S. Senate on December 15 passed H.R.4853. H.R.4853 is the year-end tax bill that contains a two-year reinstatement of the estate tax; a two-year extension of current law income, capital gains and dividend tax rates; and a 13-month extension of unemployment benefits. The bill now goes to the House, where an attempt to change the estate tax rules is expected. Regardless of potential House changes to the estate tax rules, final enactment of the legislation is expected.

The Senate-passed bill includes the following provisions:

Income Tax Rates: Current law (2010) income tax rates would be extended for two years, through the end of 2012, for all taxpayers, regardless of income level. This includes extension of the 10, 25, 28, 33 and 35 percent rate brackets. Also extended in the bill are the personal exemption phase-out rule and the itemized deduction limit—the so called PEP and Pease rules—the latter named for the former lawmaker who devised it. The Pease rule limits high-income taxpayers’ itemized deductions when total deductions exceed the amount of the standard deduction. PEP and Pease rules for 2010 would be extended through 2012.
Capital Gains Tax Rates: The current law capital gains rate (15 percent for those in the 25 percent and greater tax brackets) would be extended through 2012. Absent this bill, the capital gains rates would revert to their 2001 levels of 10 percent and 20 percent.
Dividends Tax Rates: In 2010, qualified dividends are taxed as capital gains (generally, at the 15 percent rate). The 2010 rule is scheduled to expire on December 31, 2010. This bill would extend the rule through 2012. If the bill does not pass, dividends would be taxed as ordinary income—thus, at the taxpayer’s highest marginal tax rate level.
Estate Tax: The Senate bill would restore the estate tax for 2011 and 2012, with a 35 percent top rate and a $5 million/individual ($10 million/couple) exemption. The exemption amount would be indexed for inflation, beginning in 2012. The bill would reunify the estate and gift tax, effective for gifts made after December 31, 2010.

The provision includes authority for the executor of the first-to-die-in-a-married-couples’ estate to automatically transfer unused exemption amounts to the surviving spouse. For 2010, decedents’ estates would have the option to elect 2010 law (no estate tax, modified carryover basis) or the rules for 2011 and 2012. For the generation-skipping tax exemption, there would be a $5 million exemption and a zero percent rate for 2010.

House Democrats are discussing possible amendments to the Senate bill’s estate tax provisions. The estate tax provisions have emerged among House Democrats as the most controversial element of this year-end tax bill. The most likely amendment is one that would set the estate tax rules at 2009 levels (45 percent top rate, $3.5 million/individual exemption). House Democratic Leaders are projecting that whatever the House does, it will do it in a way that will not block enactment of the bill into law by the end of the year. The House is not expected to make any other changes to the bill as passed by the Senate.

AMT: The Senate bill “patches” the alternative minimum tax (AMT) for 2010 and 2011. For 2010, the exemption from AMT would be $47,450 for individuals and $72,450 for married couples filing jointly. The patch amount would rise to $48,450/individual and $74,450/marrieds for 2011. The bill also allows taxpayers to use nonrefundable personal tax credits against their AMT tax liability.
Business Investment Incentives: The Senate bill includes a bonus depreciation provision for investment in new business equipment. The provision would allow a business to expense the cost of qualified investments (deduct 100 percent of the full cost of those investments in the year of purchase) placed in service after September 8, 2010 and before January 1, 2012. For 2012, business could expense 50 percent of the investment’s purchase price (the balance would be subject to depreciation rules applicable to capital acquisitions). The provision would also permit a business to choose to accelerate AMT credits instead of using bonus depreciation in 2011 and 2012.
Small Business Expensing: The Senate bill extends section 179 small business expensing. Effective January 1, 2012, the provision allows a full deduction for a capped amount of small business investments (in capital equipment). The thresholds at which the deduction is available phase out. Under this bill, for 2012 the full deduction would be $125,000. Lesser deductions would be available, phasing up to $500,000. The amounts are indexed for inflation.
Payroll Tax Adjustment: The Senate bill temporarily drops the employee share of Social Security tax from 6.2 percent to 4.2 percent. It also drops self-employed payroll tax liability from 12.4 percent to 10.4 percent. This tax break for both employees and for self-employed individuals is good only in 2011. It applies only up to the wage base ($106,800 in 2011).
Tax Extenders: The Senate bill includes what has become a traditional package of tax extenders, including the provision that allows a direct tax-free gift from IRAs to charities. Other business extenders included in the package include the exclusion of certain small business capital gains, research and development tax credit, the work opportunity tax credit, and the new markets tax credit.
Education Tax Incentives: H.R.4853 extends the Coverdell Education Savings Account contribution limit of $2,000 through 2012. It also extends the expanded exclusion for employer-provided educational assistance, also through 2012. Further, the bill extends for two years the 2010 law that provides an expanded deduction for student loan interest. Also extended is the American Opportunity Tax Credit (AOTC) which provides a tax credit for up to $2,500 of the cost of tuition and related expenses. The AOTC is income-limited, and will expire at the end of 2010 if this bill does not pass. This bill extends it through 2012. The above-the-line deduction for qualified tuition and related expenses would also be extended, to include 2010 and 2011.
Unemployment Benefits: The bill extends eligibility for unemployment benefits, for a maximum of 99 weeks - December, 2010 through 2011.
Other Tax Extensions: Other 2010 tax rules extended in H.R.4853 include the child tax credit, marriage penalty relief, the dependent care credit, the adoption tax credit and adoption assistance programs exclusion, the employer credit for child care assistance, the optional deduction for state and local general sales taxes, the earned income tax credit, a package of energy-related tax provisions, and others unrelated to insurance interests.

The Senate bill does NOT include:

1099 Reporting Requirement: The Senate-passed bill does not include repeal of the 1099 reporting requirement. However, many lawmakers vow to take up 1099 reporting requirement repeal early in 2011.

Next Steps: It may take another few days for the House and Senate to finalize action on H.R.4853 and send it to the President for signature into law. But at this point it appears the bill is on track to enactment by year’s end with little to no substantial change from the summary above. We’ll keep you posted.

NAIFA Staff Contact: Diane Boyle, Vice President - Federal Government Relations; or Dani Kehoe, NAIFA Outside Counsel.

Back to NAIFA GovWatch