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Sun Setting Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001

Sun Setting Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001

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Published by oberini
The calamity surrounding the Bush's tax cuts - To extend, or not to extend
The calamity surrounding the Bush's tax cuts - To extend, or not to extend

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Published by: oberini on Nov 15, 2010
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11/15/2010

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 Special Report
CCH Tax Briefing
September 13, 2010
Sunsetting Benefits of the Economic Growthand Tax Relief Reconciliation Act of 2001
Sunset Of EGTRRAIndividual Rate CutsExpiration Of MarriagePenalty ReliefReinstated ItemizedDeduction/PersonalExemption PhaseoutsReduced Child Tax CreditEnd Of Lower Capital Gains/Dividends RatesReduced Code Sec. 179ExpensingSunset Of EnhancedEducation Tax IncentivesRevived Federal Estate TaxExpiration of GST TaxReformsAnd More
INSIDE
Sunsets Facing Individuals .....................1Income Tax Rates for Individuals .....1Child Tax Credit..................................4AMT Exemption Amounts ................5Capital Gains and Investment Sunsets .....6Capital Gains Ratesfor Individuals ................................6Dividend Income of Individuals ......6Expensing for Small Business ..........8Education Sunsets ..................................8Federal Estate, Gift and GST Sunsets ....9Estate and Gift Tax Rates .................9Estate and Gift Tax ExemptionAmounts ........................................10
HIGHLIGHTS
EGTRRA SUNSET BRINGSNEW CHALLENGES TO PLANNINGFOR 2011
ime is almost up or the historictax cuts enacted by the EconomicGrowth and ax Relie Reconcilia-tion Act o 2001 (EGRRA). Without any Congressional action, many popular taxcuts automatically disappear (“sunset’’) aterDecember 31, 2010. Tey will be replacedby rates, deductions, credits and other pro-visions based on the ar less generous lawin place beore EGRRA. Additionally,enhanced capital gains and dividends taxrates in the Jobs and Growth ax Relie Reconciliation Act o 2003 (JGRRA) andsubsequent legislation will also sunset aterDecember 31, 2010.
Tis CCH ax Brie-ing alerts tax practitioners and their clients towhat the ax Code is scheduled to look like ater EGRRA’s and JGRRA’s tax benefts sunset ater December 31, 2010.
IMPACT.
While individual, capital gains/ dividends and estate tax rate cuts remainthe ocus o the expiring tax cuts and are the most likely provisions to get Congress’ attention this Fall, EGRRA made over 50 other major changes to the ax Code that will also sunset. Congress may ig-nore them entirely, or re-evaluate eachon a case-by-case basis. Other EGRRAchanges, notably its sizeable package o  pension reorm measures, were spared the sunset ax by the Pension Protection Act o  2006 and subsequent legislation.
COMMENT.
It appears the House is looking to the Senate to take the lead onextending EGRRA. Te Senate, how-ever, is hampered by its supermajority rules, which require 60 votes to deeat any flibuster and pass a bill. Te Sen-ate may seek a compromise and extend the EGRRA tax cuts or one or two years, rather than permanently. Te timeline or Senate action is also uncer-tain. On September 8, Senate Majority Leader Harry Reid, D-Nevada, said he is committed to holding a lame-duck session ater the November elections but did not say what legislation he intends to address.
SUNSETS FACINGINDIVIDUALS
EGRRA targeted tax relie to individu-als through marginal tax rate reduction,marriage penalty relie, an increased childtax credit, and more.
See also Capital Gains and Investment Sunsets and Estate ax Sun-sets in this Briefng or additional provisions aecting individuals.
Income Tax Rates for Individuals
Regular income tax liability is determinedby applying the regular income tax rateschedules to the individual’s taxable income.Te rate schedules are divided into rangeso income, known as income brackets, andvary or single flers, married taxpayers flingseparately, joint flers, heads o households,and estates and trusts. Te marginal tax rateincreases as the taxpayer’s income increases.Beore EGRRA, the individual marginalincome tax rates were 15, 28, 31, 36, and39.6 percent. EGRRA gradually reducedthe individual marginal income tax rates (ac-celerated by JGRRA). For 2010, the indi-
 
CCH Tax Briefing
©2010 CCH. All Rights Reserved.
2
vidual marginal income tax rates are 10, 15,25, 28, 33, and 35 percent.Under the sunset provision o EGRRA,amendments made by the Act will not ap-ply to tax years beginning ater December31, 2010. Consequently, the individualmarginal tax rates will revert to 15, 28, 31,36, and 39.6 percent eective or tax yearsbeginning ater December 31, 2010.
10 Percent Rate.
EGRRA created a newbracket, the 10 percent tax rate, or a por-tion o individual income previously taxedat 15 percent. Ater December 31, 2010, the10 percent rate will disappear and the frstportion o taxable income or all taxpayersthereore will again be taxed at 15 percent.
IMPACT.
EGRRA made across the board rate reductions but its greatest beneft was to taxpayers in the top twoincome brackets. Ater 2010, higher-income taxpayers not only are scheduled to be subject to higher marginal income tax rates, they also, eective or tax years ater December 31, 2012, will be subject to an additional 0.9 percent Medicare tax on earned income above $200,000 ($250,000 or married couples fling a joint return) and a 3.8 percent Medi-care tax on the lesser o the individual’s net investment income or the tax year or modifed AGI in excess o $200,000 ($250,000 or married couples fling a joint return).
IMPACT.
Individuals expecting to be subject to a higher income tax rate ater  2010 should explore the timing o income or deductible expenses. Deerring deduc-tions into 2011 may help to oset income that would be subject to a higher rate o taxation. Accelerating income into 2010 likewise might lower overall tax liability. Acceleration techniques include billing earlier, selling appreciated property, avoid-ing installment sales that deer gain, and accelerating bonuses. Converting to a RothIRA in 2010 also gives the taxpayer the option o recognizing the conversion in-come in 2010 or pro-rata over 2011 and  2012 under existing rules.
IMPACT.
axpayers doing business as anS corp may be motivated to convert to aC corp in response to the rate increases,since the highest corporate tax rate re-mains at 35 percent. However, taxpay-ers should keep in mind the expected in-crease in dividend tax rates ater 2010. Additionally, ater an S corp converts toa C corp, it generally cannot switch back to being an S corp or the next fve years.
COMMENT.
President Obama has pro- posed to make permanent the 10, 15, 25, and 28 percent rates or tax years beginning ater December 31, 2010 but allow the 33 and 35 percent rates to sunset as scheduled. Te president has also proposed to widen the tax bracket  or the 28 percent rate so that individu-als with less than $195,550 o taxable income in 2011 ($200,000 o AGI, as-suming one personal exemption and the basic standard deduction, indexed or ination rom 2009), would not be sub- ject to the 36 percent rate. For married couples fling a joint return, the dollar threshold or the 36 percent rate would be set at approximately $237,300.
COMMENT.
 Although the tax rates are scheduled to revert to the levels in place in 2001 prior to EGRRA, the bracket amounts to which each rate is applied will continue to reect annual inationadjustments. Unlike some other EG-RRA sunset dollar amounts, those in- ation adjustments are required under the pre-EGRRA, EGRRA and post-EGRRA versions o the ax Code.
IMPACT.
By ar the costliest provision toextend is the reduced individual taxes. According to the Congressional Budget O ce (CBO), they account or over 50  percent o the total revenue loss.
Itemized Deduction Phaseout for Higher-Income Taxpayers
he limitation on itemized deductions(called the “Pease” limitation ater thename o the member o Congress whosponsored the legislation enacting thelimitation) reduces the total amount o a higher-income taxpayer’s otherwise al-lowable itemized deductions. However,certain items, such as medical expenses,investment interest, and casualty, thetor wagering losses, are excluded.Under EGRRA, the limitation on item-ized deductions was gradually repealedstarting in 2006. For 2010, the limitationon itemized deductions is entirely repealed.Te limitation threshold amount, $100,000or most taxpayers and $50,000 or marriedtaxpayers fling separate returns, was set in1991, adjusted annually or ination.Under the sunset provision o EGRRA,the limitation on itemized deductions willbe reinstated in ull or tax years beginningater December 31, 2010.
IMPACT.
Higher-income taxpayers whoanticipate being subject to the limita-tion on itemized deductions ater 2010 may want to explore the value o shit-ing some o their itemized deductions to 2010 by accelerating payment o de-ductible expenses beore year-end. Inaccelerating deductions to avoid the itemized deduction limitation, howev-er, those anticipating being in a higher rate bracket in 2011 should weigh care- ully the benefts o getting a reduced deduction that osets income taxed at a higher rate in 2011 against a ull de-duction that osets income taxed at alower rate in 2010.
COMMENT.
President Obama has pro- posed to modiy the limitation on item-
 
“EGTRRA made across theboard rate reductions butits greatest benefit was totaxpayers in the top twoincome brackets.”
 
CCH Tax Briefing
September 13, 2010
3
ized deductions or tax years beginning ater December 31, 2010, to only start beyond the $200,000 level ($250,000  or joint flers). Future years would be adjusted or ination.
Personal Exemption Phaseout for Higher-Income Taxpayers
he personal exemption phaseout (PEP)reduces or eliminates the deduction orpersonal exemptions or taxpayers withincomes over certain thresholds. hetotal amount o exemptions that may be claimed by a taxpayer is reduced by two percent or each $2,500 or portionthereo (two percent or each $1,250 ormarried couples iling separate returns)by which the taxpayer’s AGI exceeds theapplicable threshold.Under EGRRA, the personal exemptionphaseout was gradually repealed starting in2006. For 2010, the personal exemptionphaseout is entirely repealed.Under the sunset provision o EGRRA,the personal exemption phaseout will be re-instated in ull or tax years beginning aterDecember 31, 2010.
COMMENT.
 As in the case o the itemized deduction lim-itation, President Obamahas proposed to modiy the limitation on personal exemptions or tax years beginning ater December  31, 2010, to only start be- yond the $200,000 level ($250,000 or joint flers),adjusted or ination.
 Standard Deduction for Married CouplesFiling a Joint Return
Non-itemizers may takethe basic standard de-duction (and additionalstandard deductions i ap-plicable), which is subtracted rom AGIto calculate taxable income. Prior to EG-RRA, the basic standard deduction or2001 or a single individual was 60 per-cent o the basic standard deduction ormarried couples fling a joint return.Under EGRRA, the basic standard deduc-tion or a married couple fling a joint returngradually increased to twice the basic stan-dard deduction or an unmarried individualfling a single return. For 2010, the standarddeduction or joint returns as a percentage o the standard deduction or single returns is200 percent.Under the sunset provision o EGRRA,amendments made by the Act will not ap-ply to tax years beginning ater December31, 2010. Consequently, the increased ba-sic standard deduction at 200 percent o the amount allowed or an unmarried in-dividual fling a single return will not beavailable to a married couple fling a jointreturn ater 2010.
COMMENT.
 Married individuals fl-ing joint return are entitled to a stan-dard deduction o $11,400 in 2010,however i the EGRRA sunset takes eect, the basic standard deduction or  2011 can be expected to drop to some-where between $9,500 and $10,000  or joint returns.
IMPACT.
he gradual increase inthe basic standard deduction was intended to ameliorate the so-called marriage penalty and its sunset ater  2010 will revive the marriage penal-ty. A marriage penalty exists when the combined tax liability o a married couple iling a joint return is greater than the sum o the tax liabilities o each individual computed as i they were unmarried. Married couples may want to explore increasing their with-holding or making larger estimated tax payments in 2011 to avoid any adverse impact rom the sunset o the increased standard deduction or mar-ried couples.
COMMENT.
President Obama has pro- posed to permanently increase the basic standard deduction or a married couple  fling a joint return to twice the basic standard deduction or an unmarried in-dividual fling a single return, irrespective o income level.
COMPARISON OF INDIVIDUAL INCOME TAX RATES
51015202530354045
       R     a      t     e
101028252825312831283633363639.63539.639.6Pre-EGTRRAObamaProposed 2011EGTRRA Sunset 2011201015151515
* President Obama would expand the 28% bracket by starting the 36% bracket at a projected $195,550 taxableincome ($237,300 for joint filers and surviving spouse) rather than at a projected $176,146 and $214,481, respec-tively, under EGTRRA sunset.

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