Tax Legislation Update

Learn about four recent tax developments.

• Unemployment Benefits Made Retroactive to June 1, 2010 and Extended to November 30, 2010

  On July 22, 2010, President Obama signed H.R. 4213, the Unemployment Compensation Extension Act of 2010, which extends unemployment benefits retroactively to June 1, 2010. The result is that thousands of unemployed Americans will be receiving back payments. This extends the 73 weeks of federally subsidized unemployment enacted earlier in the year for states with "higher" unemployment rates. The states remain responsible for the first 26 weeks of unemployment.

  Because many items on the original bill lacked bipartisan support, the law was slow to pass. The final law removed all extensions of expiring provisions and revenue offsets (see our June 4 article).

• Small Business Tax Update: Will S Corporation Shareholders Be Subject to Self-Employment Tax?

  The original version of the House bill approved on May 28, 2010 would have subjected the non-wage earnings of certain S corporation shareholders to self-employment tax for the first time (see our June 23 article). This provision has been removed. Congressional efforts to enact this proposal have been significantly slowed due to concerns about how it might affect small business. Both the House and Senate struggle with whether to impose tax increases and spending cuts in order to offset the revenue cost of extending the expiring provisions.

• Expiring Provisions and Planning for 2011

  One of the major shadows remains as we watch our government's apparent indecision in regards to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This act, which was signed into law by President Bush, is set to expire and the affected provisions will revert to preceding tax code on January 1, 2011. Despite the wealth of blog articles and op-ed pieces on the topic in mainstream media, no one currently knows what Congress will agree upon or what the President will decide to do.

  We had expected clarity to come with the passage of H.R. 4213; however, the end of 2010 approaches and we have yet to discover how to plan for 2011. Without the extension of the expiring provisions and revenue offsets originally included, many tax credits and deductions that impact individuals and businesses will not be available for tax year 2010.

• Estate and Gift Tax Legislative Developments

  Congress is considering several proposals to permanently reform the estate tax. Among them, Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) have introduced an amendment to H.R. 5297, the Small Business Lending Bill, to reform the estate tax. This bill passed the House on June 17, 2010. The proposed Senate amendment would increase the personal exemption to $5 million, phased in over 10 years, and reduce the estate tax rate to 35% retroactively as of January 1, 2010.

Alternatively, House Representative Linda Sanchez (D-CA) introduced H.R. 5764, Responsible Estate Tax Act, on July 15, 2010. This bill is identical to the S. 3533, Responsible Estate Tax, proposed by Senators Bernard Sanders (I-VT), Tom Harkin (D-IA), and Sheldon Whitehouse (D-RI). This bill would exempt the first $3.5 million (the same exemption that existed in 2009) and would exempt 99.75% of all estates from estate tax. The estate tax rate would be 45% on estates between $3 million and $10 million (the same as the 2009 level). The rate on estates worth $10 million but less than $50 million would be 50%, and the rate on the value of estates above $50 million would be 55%. This bill would also impose a 10% surtax on the value of an estate above $500 million ($1 billion for couples). In addition, it would place restrictions on GRATs and modification of valuation discounts, similar to those proposed in other bills that have not yet passed this year.

Download Tax Legislation Update - July 30, 2010 Article