The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) initiated a series of tax cuts, including reductions in the income and estate tax rates. However, the act included a ‘sunset provision,’ which takes effect December 31, 2010. This means that as of that date, various tax laws revert to pre-2001 status, as if EGTRRA had never happened—unless additional legislation has been passed between 2001 and today. We are midway through 2010 and many clients want to know which provisions are expiring and which are here to stay. A few major EGTRRA provisions of importance to many of our clients are summarized here.
Income Tax Rates
The EGTRRA income tax rate reductions are among those set to expire at year-end. The lowest income tax bracket will increase to 15 percent (from 10 percent), while the highest bracket reverts to 39.6 percent (from 35 percent).
Long Term Capital Gains Tax Rates
Effective 2011, the long term capital gains tax rate will also be on the rise. Currently, tax payers in the 10 and 15 percent tax brackets have no tax on most long-term gains, while tax payers in higher brackets pay 15 percent. Once EGTRRA sunsets, the rate reverts to 10 percent for those in the 15 percent tax bracket and to 20 percent for those in higher tax brackets. It is important to note that 15 percent is the lowest long-term capital gains tax rate in history. This may present a planning opportunity to discuss with your Family CFO.
Estate Tax Rates
Most widely publicized are the dramatic EGTRRA changes to the Federal estate tax laws. EGTRRA increased the estate tax exemption from $1 million to $3.5 million per person from 2006 through 2009, and repealed the estate and generation skipping taxes in 2010. EGTRRA did not repeal the Federal gift tax, which is still in effect. The Act also reduced the top estate tax rate from 55 percent to 45 percent from 2006 to 2009 and eliminated the 5 percent surcharge on a portion of estates larger than $10 million. This law is among those scheduled to sunset on December 31. The result is an estate tax exemption of $1 million per person with a 55 percent top estate tax rate (plus the 5 percent surcharge for estate exceeding $10 million) for 2011.
To further complicate estate tax matters, the old “stepped-up basis” rules have been replaced by new and complicated “modified carry-over basis rules” in 2010.
Retirement Plans &IRAs
For those concerned about the pension revisions, it is good to know that these changes will not expire at the end of 2010. This is where additional legislation has passed which benefits the taxpayer. The Pension Protection Act of 2006 (PPA) repeals the sunset provision set forth originally in EGTRRA. Some of the provisions that will remain intact are increased pre-tax retirement plan and IRA contribution limitsthe creation of the age 50 “catch-up” contributionthe creation of the Roth 401(k) planand added flexibility for non-qualified retirement plans.
What should you do? Changes in tax law can be confusing, but may, in some cases, provide opportunities for clients. Continue talking with your Family CFO to identify what planning opportunities may remain in 2010 before laws revert to pre-EGTRRA rules and what items may be better left until 2011.