Extension of the Bush tax cuts - It ain't over until 2 of the 3 branches of government sing

No doubt you've been hearing about the continuing dance between President Obama, the Democrats, and the Republicans:  Extend the Bush tax cuts for only some?  If so, for who?  For all?  What else will it take to pass? 

Short answer:  Who knows?  What just yesterday seemed like a bit of welcome certainty was replaced today with additional opposition and infighting.  Nevertheless, my personal feeling is that they probably will eventually be extended, including for upper-income taxpayers.  But then again, that and $5 will get you an iced cappuccino.

At this point, a bit of background is in order.  What exactly *are* the "Bush Tax Cuts" that are dominating the news? In short, they are as follows (quoting CCH's Sunset of the 2001 & 2003 Tax Relief Acts: Law, Explanation & Analysis):

On May 26, 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Act included cuts in marginal income tax rates, marriage penalty relief, the phase-out and ultimate repeal of the estate tax, and more, as well as a complicated series of phase-in rules and effective dates. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which was signed into law on May 28, 2003, accelerated many of the tax cuts set in motion under EGTRRA. Commonly referred to as the “Bush Tax Cuts,” these two Acts made changes to over 50 provisions of the Internal Revenue Code and impacted a wide variety of taxpayers.

In order to comply with budget requirements, however, each provision in EGTRRA was subject to a sunset provision. Pursuant to the sunset provision, the changes made by EGTRRA would no longer apply after December 31, 2010. The provisions contained in JGTRRA were subject to similar sunset rules. When EGTRRA and JGTRRA were enacted with these sunset provisions, few members of Congress expected those sunsets to ever take place. But, with mere months before the sunset occurs, it is not clear what, if anything, Congress will do to extend these tax cuts. This uncertainty in the tax law generates a myriad of complexities for taxpayers and tax professionals.

Impact on Individuals

• Individual, Estate and Trust Tax Rates. Temporary decreases in the marginal tax rates for noncorporate taxpayers are scheduled to expire for tax years beginning after 2010. Thus, the tax rates for individuals, estates and trusts will revert to 15, 18, 31, 36 and 39.6 percent, and the 10-percent rate for individuals will disappear (Code Sec. 1).
• 15-Percent Tax Rate Bracket for Joint Filers. Marriage penalty relief that increased size of the 15-percent tax bracket for joint filers to twice the size of the corresponding rate bracket for single filers is scheduled to expire for tax years beginning after 2010 (Code Sec. 1).
• Standard Deduction for Married Taxpayers. The increased standard deduction amounts for married taxpayers based on the amount allowed for single taxpayers are scheduled to expire for tax years beginning after December 31, 2010. Thus, the basic standard deduction will be $5,000 for joint filers, and $2,500 for married taxpayers filing separately, both as adjusted annually for inflation (Code Sec. 63).
• Limit on Itemized Deductions for Higher-Income Individuals. The limitation on the amount of allowable itemized deductions for higher-income individuals is scheduled to be reinstated for tax years beginning after 2010. Thus, taxpayers with AGI in excess of the applicable levels will have to the reduce the amount of itemized deductions they actually deduct (Code Sec. 68).
• Phaseout of Personal Exemptions. The elimination of the phaseout of personal exemptions for higher-income taxpayers is scheduled to expire for tax years beginning after 2010. Thus, higher income taxpayers will have to reduce the amount of their personal exemptions when their AGI exceeds certain thresholds (Code Sec. 151(d)(3)).
• Coverdell Education Savings Accounts. Several modifications of Coverdell education savings accounts are scheduled to expire for tax years beginning after 2010. The annual contribution limit will revert to $500, the AGI ceilings for eligible contributors will reflect a marriage penalty, elementary and secondary school costs will not be qualified educational expenses, and several extended deadlines will no longer apply (Code Sec. 530).
• Employer-Provided Educational Assistance. An employee’s annual exclusion of up to $5,250 in employer-provided educational assistance is scheduled to expire for tax years beginning after 2010 (Code Sec. 127).
• Excludable Federal Health Scholarships. The exclusion from gross income for certain federal and military medical scholarships that include obligatory service requirements is scheduled to expire for tax years beginning after 2010 (Code Sec. 117).
• Student Loan Interest Deduction. Expansions of the student loan interest deduction are scheduled to expire for tax years beginning after 2010, so that the deduction will not apply to voluntary interest payments or interest paid after the first 60 months of repayment, and the deduction will phase out at lower AGI levels (Code Sec. 221).
• Tuition deduction. For tax years beginning after 2009, the above-the-line deduction for qualified tuition and related expenses expires (Code Sec. 222).
• Earned Income Tax Credit. Several changes to the earned income credit are scheduled to expire for tax years beginning after 2010, so that the credit phase-outs will be based on modified AGI and will include a larger marriage penalty, earned income will no longer be limited to amounts included in gross income, the credit will be reduced by the taxpayer’s AMT liability, and the IRS will no longer be authorized to deny the credit based on information from the federal child support database (Code Sec. 32).
• Child Tax Credit. The child credit is scheduled to revert to $500 for tax years beginning after 2010, and the refundable credit will be limited to taxpayers with at least three qualifying children (via the supplemental child credit component of the earned income credit) (Code Sec. 24).
• Child and Dependent Care Credit. The child and dependent care credit is scheduled to decrease for tax years beginning after 2010 because of reductions in the credit percentage, creditable expenses, and income phase-outs (Code Sec. 21).
• Adoption Credit and Adoption Assistance Programs. For tax years beginning after 2011, the maximum adoption credit is scheduled to revert to $5,000 ($6,000 for a child with special needs) and the exclusion for employer-paid or employer-reimbursed adoption expenses is scheduled to expire (Code Secs. 36C and 137).
• Alternative Minimum Tax Exemption. The AMT exemption amounts for tax years beginning after 2009 are $45,000 for married individuals filing joint returns and surviving spouses, $33,750 for unmarried individuals and $22,500 for married individuals filing separate returns (Code Sec. 55).

Impact on Business and Investment

• Capital Gains Tax Rates. General reductions in the maximum tax rates for noncorporate taxpayers’ capital gains are scheduled to expire for tax years beginning after 2010, so that the maximum rate will be 20 percent (10 percent for taxpayers in the 15-percent income tax bracket). These rated will be reduced to 18 percent and 8 percent, respectively, for qualified five-year gain (Code Secs. 1(h) and 55(b)(3)(C)).
• AMT Preference for Small Business Stock. The amount of excluded gain on small business stock that is treated as an alternative minimum tax (AMT) preference item is scheduled to increase for tax years beginning after 2010 (Code Sec. 57(a)(7)).
• Dividends. Dividends received by noncorporate taxpayers (including dividends received through mutual funds, REITs and other pass-through entities) are scheduled to be taxed as ordinary income, rather than as capital gains, for tax years beginning after 2010 (Code Sec. 1(h)(11)).
• Credit for Employer-Provided Child Care Facilities. The income tax credit for qualified expenses incurred by an employer in providing child care for employees is scheduled to expire for tax years beginning after 2010 (Code Sec. 45F).
• Accumulated Earnings Tax Rate. The tax rate on corporate accumulated earnings is scheduled to revert to 39.6 percent from 15 percent for tax years beginning after 2010 (Code Sec. 531).
• Personal Holding Company Tax Rate. The tax rate on personal holding companies is scheduled to revert to 39.6 percent from 15 percent for tax years beginning after 2010 (Code Sec. 541).
• Collapsible Corporations. The collapsible corporation rules are scheduled to take effect again for tax years beginning after 2010, so that shareholders’ distributions and gain on stock sales may constitute ordinary income rather than capital gain (Code Sec. 341).
• Alaska Native Settlement Trusts. Several special rules for calculating, taxing and reporting the income of Alaska Settlement Trusts and their beneficiaries are scheduled to expire for tax years beginning after 2010 (Code Secs. 646 and 6039H).
• Rebate Exception for School Construction Bonds. The amount of public schools bonds that small governmental units may issue without being subject to arbitrage rebate requirements is scheduled to revert to $10 million from $15 million for tax years beginning after 2010 (Code Sec. 148).
• Exempt Facility Bonds. The treatment of public school bonds as exempt facility bonds is scheduled to expire for tax years beginning after 2010 (Code Sec. 142(a)(13)).

Impact on Estate, Gift, and Generation-Skipping Taxes

• Estate and Generation-Skipping Transfer Taxes. The one-year repeal of federal estate and generation-skipping transfer (GST) taxes is scheduled to expire, so that federal estate and GST taxes will again apply to the estates of decedents dying and GSTs made after 2010.
• Transfer Tax Rates. Lower transfer tax rates are scheduled to expire with respect to the estates of decedents dying and gifts and GSTs made after 2010, so that the maximum rate will again be 55 percent, and a five-percent surtax will apply to many estates and gifts that exceed $10 million (Code Sec. 2001).
• Transfer Tax Exclusion and Exemption Amounts. The increases in the estate tax applicable exclusion amount and the GST tax exemption amount are scheduled to expire, so that the estate tax applicable exclusion amount for decedents dying and GSTs made after 2010 will be $1 million (as adjusted for inflation) (Code Secs. 2010 and 2505).
• Qualified Family-Owned Business Interest Deduction. The qualified family-owned business interest (QFOBI) deduction is scheduled to be restored for estates of decedents dying after 2010, so up to $675,000 of the adjusted value of QFOBIs will be excludable by an electing estate (Code Sec. 2057).
• State Death Taxes. For the estates of decedents dying after 2010, the tax credit for estate, inheritance, legacy, or succession taxes paid to any state or the District of Columbia is scheduled to be restored, and the state death tax deduction is scheduled to expire (Code Secs. 2011 and 2058).
• Estate Tax Exclusion for Qualified Conservation Easements. The easing of location requirements for an estate’s excludable qualified conservation easements is scheduled to expire for decedent’s dying after 2010 (Code Sec. 2031(c)).
• Basis for Property Acquired from a Decedent. The modified carryover basis rules applicable to property acquired from a decedent are scheduled to expire for persons dying after 2010, so that the income tax basis of property acquired from a decedent at death generally will be stepped-up (or down) to its value as of the date of the decedent’s death. Executor reporting requirements and penalty provisions relating to the carryover-basis regime are also scheduled to expire (Code Secs. 1014 and 1022).
• Income Tax Exclusion for Sale of Principal Residence. The exclusion from gross income for gain realized on the sale of a decedent’s principal residence by the estate, heir or qualified revocable trust is scheduled to expire for decedent’s dying after 2010 (Code Sec. 121(d)(11)).
• Gain on Distributions of Appreciated Property. The limitation on the recognition of gain on appreciated carryover basis property in satisfaction of a pecuniary bequest (or an equivalent distribution from a trust) is scheduled to expire for estates of decedents dying (or trust distributions made) after 2010, so the limitation will again apply only to transfers of appreciated farm or closely held business real estate (Code Sec. 1040).
• Miscellaneous Amendments to Incorporate Carryover Basis Rules. Several amendments to the Internal Revenue Code that incorporated the modified carryover basis rules are scheduled to expire with respect to decedents dying after 2010, including: the recognition of gain on transfers of assets by a U.S. person to a nonresident alien by bequest (Code Sec. 684); the capital gains treatment of the sale of certain inherited creative works (Code Sec. 1221(a)(3)(C)); the imposition of private foundation rules on split-interest trusts (Code Sec. 4947(a)(2)(A)); and the definition of the term "executor" (Code Sec. 7701(a)(47)).
• Deemed and Retroactive Allocations of GST Exemption. For purposes of the GST tax, the deemed allocation and retroactive allocation provisions are scheduled to expire for GSTs made after 2010 (Code Sec. 2632).
• Severing a Trust. The provision allowing for a qualified severance of a trust for purposes of the GST tax is scheduled to expire for GSTs made after 2010 (Code Sec. 2642).
• Modification of Valuation Rules. The clarification of the valuation rules with respect to the determination of the inclusion ratio for GST tax purposes is scheduled to expire for transfers made after December 31, 2010 (Code Sec. 2642).
• Late Elections and Substantial Compliance. The provisions providing relief from late GST allocations and elections are scheduled to expire for GSTs made after 2010 (Code Sec. 2642).
• Deferred Estate Tax Payments. The expansion of eligibility for deferred estate tax payments is scheduled to expire for estates of decedents dying after 2010, so deferred payments will not be allowed if the decedent’s closely held business had more than 15 partners or shareholders (Code Sec. 6166(b)).
• Estate Tax Installment Payments and Stock in Lending and Finance Businesses. The rule permitting stock in qualifying lending and financing entities to be treated as stock in an active trade or business for purposes of the election to pay estate tax in installments is scheduled to expire for decedents dying after 2010 (Code Sec. 6166(b)).
• Estate Tax Installment Payments and Holding Company Stock. Special rules regarding holding company stock are scheduled to expire for decedents dying after 2010,, so the rule requiring that stock in a holding company must be non-readily tradable in order to qualify for purposes of the installment payment rules will apply to operating subsidiaries, as well as the holding company (Code Sec. 6166(b)). 

So there you have it.  Probably more than you wanted to know, but that's often how it goes in the wonderful world of tax!



Links/Additional Reading:

• U.S. Government Printing Office:  Text of Public Law 107-16 (The Economic Growth And Tax Relief Reconciliation Act Of 2001 or "EGTRRA")  [http://www.gpo.gov/fdsys/pkg/PLAW-107publ16/pdf/PLAW-107publ16.pdf]
• U.S. Government Printing Office:  Text of Public Law108-27 (The Jobs And Growth Tax Relief Reconciliation Act Of 2003 or "JGTRRA")  [http://www.gpo.gov/fdsys/pkg/PLAW-108publ27/pdf/PLAW-108publ27.pdf]
• Joint Committee on Taxation:  Summary Of Provisions Contained In The Conference Agreement For H.R. 1836, The Economic Growth And Tax Relief Reconciliation Act Of 2001  [http://www.jct.gov/publications.html?func=download&id=2003&chk=2003&no_html=1]
• Joint Committee on Taxation: Summary Of Conference Agreement On H.R. 2, Jobs And Growth Tax Relief Reconciliation Act Of 2003  [http://www.jct.gov/publications.html?func=download&id=1747&chk=1747&no_html=1]
• Tax Policy Center (Urban Institute and Brookings Institution):  The Tax Policy Briefing Book, A Citizens' Guide for the 2008 Election and Beyond - Bush Tax Cuts  [http://www.taxpolicycenter.org/upload/Background/I-11thru1-14TheBushTaxCuts.final.pdf]
• CCH:  EGTRRA Sunset Brings New Challenges to Planning for 2011 [http://www.cchgroup.com/opencms/opencms/web/TAA/PDFs/legislation/sunsettax.pdf]