January brought two surprises to Capitol Hill. Health care reform, which appeared to be on a fast track to enactment, was significantly slowed by the Democrats’ loss of their filibuster-proof majority in the Senate. Congress also did not pass a retroactive extension of the federal estate tax for 2010, leaving intact, at least for the immediate future, a new carryover basis regime. The new make-up of the Senate is expected to shift Congress’ focus to more job creation measures, possibly with some targeted business tax cuts.

Health care reform
On January 19, voters in Massachusetts elected a Republican to fill the Senate seat held by the late Democratic senator Ted Kennedy. The new composition of the Senate is 59 Democrats and 41 Republicans. The election deprived Democrats of their 60-vote filibuster proof majority in the Senate.
Democrats were counting on 100 percent party unity in the Senate to pass a final health care bill. Even if every Democrat votes in favor of health care reform, the bill will be vulnerable to a GOP filibuster. The election has forced Democrats to rewrite their playbook for health care and other pending legislation. Democrats may try to persuade one Republican senator to vote in favor of health care reform but they are unlikely to win any GOP support. Equally unlikely is that the House will approve the Senate health care bill, thereby negating the need for another Senate vote. Many House Democrats believe the Senate bill falls short of comprehensive health care reform.
More likely, Democrats will attempt to move a smaller health care reform bill. It is unclear if a smaller bill will require individual and/or employer coverage and impose additional taxes for individuals/employers that fail to comply with the mandate. Democratic leaders have not given a timetable for moving a smaller bill.

Estate tax
As of January 1, 2010, the federal estate tax is abolished. In its place is a modified carryover basis regime. Under this rule, the income tax basis of property acquired from a decedent’s estate holding significant appreciated property generally must be carried over from the decedent under this repeal. Executors may partially increase the basis of property by up to $1.3 million ($3 million in the case of property passing to a surviving spouse). The House had approved a one-year extension of the federal estate tax in December but the Senate failed to vote on the bill before January 1, 2010. Many members of the Senate support a one-year extension but lawmakers are divided over whether to make the extension retroactive to January 1, 2010.

Jobs bill
The House approved a jobs bill in December but the bill has languished in the Senate. The continuing economic downturn and high unemployment has motivated many lawmakers to pass a more robust jobs bill. Support is strong in the Senate for extending some business tax incentives that expired at the end of 2009, such as bonus depreciation and enhanced small business expensing. The White House is also in favor of a new tax credit to reward employers that hire new workers. Details are sketchy but it could be modeled on the Work Opportunity Tax Credit.

Haiti relief
Shortly after the devastating earthquake in Haiti, Congress approved a special tax incentive to encourage Americans to help the island nation recover. Taxpayers can treat monetary contributions to Haiti earthquake relief made after January 11, 2010 and before March 1, 2010 as if they had been made on December 31, 2009. In other words, taxpayers can deduct these contributions on their 2009 returns. However, contributions cannot be deducted in both years.

We will keep you posted of developments in Congress. Please contact us if you have any questions about federal tax legislation.