Client Alert
December 23, 2010
The Middle Class Tax Relief Act of 2010:
What You Need to Know


By Wayne C. Buckwalter, Esq.

On December 17, 2010, President Barack Obama signed an $858 billion compromise tax package which extends and expands the Bush-era tax cuts through 2011 and 2012. The Middle Class Tax Relief Act of 2010 (Act) creates a maximum rate of 35% for estate tax, gift tax and generation skipping tax. In addition, the Act also increases the individual lifetime exemption to $5 million (increased from $1 million) which enables a married couple to protect a total of $10 million with proper planning. It also includes incentives for businesses.

Some highlights of the Act include: 

  • Expanded Code Sec. 179 Expensing. In 2012, the expensing and investment limits were scheduled to revert to their pre-2008 Stimulus Act levels of $25,000 and $200,000, respectively, not indexed for inflation. Under the new law, the maximum deduction will increase from $25,000 to $125,000 for 2012, and the investment limit from $200,000 to $500,000. The new law also treats off-the-shelf computer software placed in service prior to 2013 as qualifying property.
     
  • Bonus Depreciation. The Act increases 50% bonus depreciation to 100% for qualified investments in new, original-use property made after September 8, 2010 through December 31, 2011. The Act also allows 50% bonus depreciation for qualified property placed in service after December 31, 2011 and before January 1, 2013. Transportation property and certain longer production period property is eligible for 100% expensing if placed in service before January 1, 2013. This provision is available for all businesses and is not subject to a dollar-level cap. 
     
  • Gift Tax & Estate Tax Exemption. A top marginal gift tax rate of 35% and an individual gift tax exemption of $5 million ($10 million for married couples) will apply for lifetime gifts in 2011 and 2012.
     
  • Estate Tax Rates & Exemptions. A top estate tax rate of 35% (reduced from 55%) and a $5 million individual estate tax exemption ($10 million for married couples) will apply for estates created in 2010, 2011 and 2012. There is also an election available which may result in no estate tax for estates created in 2010. In addition, the individual estate tax exemption is now “portable” which means that an executor may transfer any unused exemption to a surviving spouse beginning January 1, 2011.
     
  • Generation Skipping Transfer Tax. The Generation Skipping Transfer Tax (GSTT) rate will be 0% for 2010 and 35% for 2011 and 2012. The lifetime GSTT exemption will be $5 million ($10 million for married couples) for 2010, 2011 and 2012.
     
  • Capital Gains & Dividend Rates. There is a 2 year extension through 2012 of the current top federal capital gains rate and qualified dividend rate of 15% for all taxpayers without income restrictions.
     
  • IRA Charitable Rollovers. Individuals over age 70 ½ may make tax-free distributions from an IRA directly to qualified charities in amounts up to $100,000 per year through 2011. Such gifts are most advantageous when used to count towards required minimum distributions. 

While this list is certainly not comprehensive, these provisions are very favorable to business and individual taxpayers. Many business owners and individuals, with proper planning, will no longer be subject to estate tax or at the very least be able to minimize potential exposure. Existing estate plans, based on prior law, may be greatly simplified. The Act includes additional incentives for businesses and individuals.

For more information regarding the Act and its potential implications on your business and/or personal estate plan, please contact Wayne C. Buckwalter, Chair of Cohen Seglias' Wealth Preservation Group at (215) 564-1700 or wbuckwalter@cohenseglias.com.

     
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