At the start of 2010, Congress had a full tax agenda. As summer approaches, many tax bills remain unfinished, most notably an estate tax bill. Other important tax legislation is also on Congress’s agenda for action before year-end.
The federal estate tax was abolished as of January 1, 2010. In its place, a modified carryover basis regime is applied to large estates. However, this treatment is temporary and the federal estate tax will return in 2011 at higher rates than in recent years.
Congress has tried several times, but failed, to extend the federal estate tax. In late 2009, the House approved a permanent extension of the estate tax but the bill has languished in the Senate. The estate tax was put on the back burner as the Senate debated health care reform and financial reform. The Senate could take up the House bill this summer or pass its own bill. In that case, the bill would have to go back to the House, delaying passage even more.
Individual tax rates
Almost 10 years ago, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The law gradually reduced the individual marginal tax rates. For 2010, the individual marginal tax rates are 10, 15, 25, 28, 33, and 35 percent. After December 31, 2011, the rates will revert to their pre-EGTRRA percentages. The top two rates will rise from 33 and 35 percent to 36 and 39.6 percent.
President Obama has asked Congress to extend all of the lower rates except for the top two rates. The 36 percent and 39.6 percent rates would apply to individuals with incomes over $200,000 and married couples filing joint returns with incomes over $250,000. Congress could extend the lower rates permanently or for a period of years. The large federal budget deficit has some lawmakers talking about a temporary extension of the lower rates and revisiting them when the economy rebounds.
Democratic leaders in the House and Senate have not indicated when legislation extending the lower rates will be introduced. Many lawmakers are wary of raising taxes before the November Congressional elections so legislation may wait until a lame duck session in December.
Capital gains and dividends
The maximum dividends and capital gains tax rate for 2010 is 15 percent (zero percent for taxpayers in the 10 or 15 percent brackets). After December 31, 2010, the maximum capital gains tax rate will rise to 20 percent for all taxpayers. Dividends will return to being taxed as ordinary income.
President Obama has also asked Congress to extend the current dividends and capital gains tax rate but impose a higher rate on higher-income taxpayers. The maximum rate on dividends and capital gains for individuals with incomes over $200,000 and married couples filing jointly with incomes over $250,000 would be 20 percent. The 15 and zero percent rates would apply to all other taxpayers.
The alternative minimum tax (AMT) is, as its name says, an alternative tax to the regular tax. Because the AMT was not indexed for inflation, and for other reasons, the AMT is gradually encroaching on middle income taxpayers, contrary to Congress’s original intent. The large federal budget deficit again makes lawmakers wary of repealing the AMT. Instead, Congress has “patched” it annually.
The AMT patch provides relief by giving taxpayers higher exemption amounts. Additionally, the nonrefundable personal tax credits are allowed to the full extent of the taxpayer’s regular tax and AMT liability.
Child tax credit
In 2009, Congress enhanced the child tax credit by increasing the refundable portion of the credit for the 2009 and 2010 tax years to 15 percent of earned income in excess of $3,000. Several bills are pending in Congress to make permanent the $3,000 threshold or reduce it even further.
Many tax bills have been introduced since the start of the year and have been referred to the House and Senate tax writing committees. Among the pending bills are ones to:
– Extend the Making Work Pay Credit
– Extend the American Opportunity Tax Credit
– Renew the first-time homebuyer tax credit
– Reforming the worker classification rules
– Enhance transportation fringe benefits
– Make permanent the Build America Bonds program
Please contact us if you have any questions about pending federal tax legislation.