Ten years ago, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001. That Act provided a number of income, estate and gift tax changes that were put into effect, or scheduled changes to become effective in the years ahead. Many of the changes that took effect under EGTRRA 2001will expire on December 31, 2010, unless Congress enacts new laws or passes extensions. If EGTRRA 2001 expires, taxpayers will face several significant changes.
Income Tax Changes
During the past 10 years the lowest marginal tax rate has been 10% and the highest rate has been 35% for individuals. The 10% floor goes away, moving to the 15% rate and the highest rate increases to 39.6%. The rates in-between also increase, so tax increases are in store for most taxpayers.
In 2010, qualified dividends and capital gains are taxed no higher than 15% and could be taxed as low as 0% (yes, zero). Beginning in 2011, capital gains tax moves up to 20% and the tax savings seen for qualified dividends for the past years will vanish—the rate next year on qualified dividends could be as high as the highest rate—39.6%.
The Child tax credit, which for 2010 is $1,000, will revert to a $500 amount for 2011. The amount of the credit that is refundable vs. non-refundable changes in 2011, too.
There has been an opportunity, if you qualify, to deduct as much as $4,000 of the cost of tuition and fees for post-secondary education. This deduction is eliminated for 2011. However, the Lifetime Learning Credit and the American Opportunity Credit will still be available.
Another change to look out for in 2011 is what's been referred to as the Marriage Tax Penalty. Without going into much detail, changes will occur in the Married Filing Jointly Standard Deduction amount, the Married Filing Jointly tax bracket, the Earned Income Credit phase-out range and the Education Savings Account phase-out range. If your taxable income exceeds the $56,000 level, and you filing status is "Married" you will see additional tax due.
Changes will affect the calculation of the Earned Income Credit for 2011—any income from employment will be used to calculate the EIC. This includes income that has previously been excluded from the calculation, such as deferrals for 401(k) contributions and nontaxable combat pay, to name two.
An adoption tax credit is available to those who adopt an eligible child, and who have modified adjusted gross income of less than $222,520 in 2010. In 2011 the adoption tax credit will only be available if the adopted child is a special needs child.
Student loan interest is deductible to qualified individuals up to $2,500 in 2010. Single individuals with income over $75,000 and married individuals with income over $150,000 lose the ability to deduct the interest. For 2011, student interest is only deductible during the first 60 months of the loan repayment period, and only if single taxpayers have adjusted gross income under $55,000 and married taxpayers have adjusted gross income under $75,000.
While few taxpayers who have real estate taxes don't itemize their deductions on their tax returns, those that do not itemize are able to take the standard deduction plus a separate deduction for real estate taxes in an amount of no more than $500 if single and $1,000 if married for 2010. This special deduction is not available in 2011.
Estate Tax Changes
According to a Congressional Research Service report ("Estate Tax Legislation in the 111th Congress") dated 7/16/10, the estate tax law in 2009–2011 takes large swings. The applicable exclusion amount (or exemption) was $3.5 million for anyone who died in 2009. The estate tax is (currently) repealed for people who die in 2010; instead, a step-up-in-basis allowance is added to the decedent's carryover basis equal to $1.3 million per decedent plus another $3 million for assets transferred to a surviving spouse. Assuming Congress does not change the law beforehand, a $1 million exclusion (exemption) will apply to persons dying in 2011 and thereafter. The difference in potential estate tax liability is significant, depending upon which year the taxpayer dies. For example, the approximate estate tax due on a taxable estate of $4 million would be $225,000 if the taxpayer died in 2009, zero in 2010, and $1,495,000 in 2011 and subsequent years. (Source Thompson Reuters/PPC)
Gift Tax Changes
In 2010, the top Gift Tax Rate is 35% and the annual exclusion amount is $13,000 while the lifetime exemption amount is $1,000,000. There is no Generation Skipping Tax for 2010. However, the situation changes drastically in 2011 when the top rate moves to 55% and the Generation Skipping Tax is reinstated.
Gerard J. Kassouf, CPA is a director at the