Provisions of the 2010 Tax Relief Act

After much wrangling among members of Congress, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) on Dec. 17, 2010. The new law, estimated at a cost of $800 billion, contains numerous tax incentives and relief provisions that will directly or indirectly affect law firms, partners, their staffs and their clients. It extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years, provides for an AMT “patch,” a one-year payroll tax cut, 100% bonus depreciation through 2011 and 50% bonus depreciation for 2012, a top federal estate tax of 35% with a $5 million exemption, and more. The following are highlights of these provisions:

Enhanced Bonus Depreciation

The 2010 Tax Relief Act boosts 50% bonus depreciation to 100% for qualified investments made after Sept. 8, 2010 and before Jan. 1, 2012. The new law also makes 50% bonus depreciation available for qualified property placed in service at any time in 2012.

Generally speaking, qualified property for Bonus Depreciation is defined as new property (original use must begin with the law firm or the client claiming the deduction) with a MACRS recovery period of 20 years or less. It includes most machinery, equipment, computer software, and furniture and fixtures. For 2010 and 2011, it also includes 15-year qualified leasehold improvements.

One hundred percent Bonus Depreciation is not to be confused with Code Section 179 Expensing, which follows its own set of rules. Bonus Depreciation is generally less restrictive than Sec. 179 Expensing in that it is not subject to dollar and investment limits, and is not subject to taxable income limitations. On the other hand, Sec. 179 Expensing applies to used as well as new property.

Code Section 179 Expensing

The 2010 Small Business Jobs and Credit Act (SBJC), signed into law on Sept. 27, 2010, had increased the Code Sec. 179 dollar and investment limits to $500,000 and $2 million, respectively, for tax years beginning 2010 and 2011. For 2012 only, the 2010 Tax Relief Act provides for a $125,000 dollar limit and a $500,000 investment limit. After 2012, unless the provisions of the 2010 Tax Relief Act are extended, the dollar and investment limits are scheduled to revert back to $25,000 and $200,000 respectively.

The 2010 Tax Relief Act also extends the treatment of off-the-shelf computer software as qualifying property if placed in service before 2013. The new law, however, does not extend the Sec. 179 provisions to qualified real property placed in service after Dec. 31, 2011.

(For a more detailed discussion of Code Section 179 Expensing as well as Bonus Depreciation, please see “Provisions of the Small Business Jobs and Credit Act of 2010,” by Richard H. Stieglitz and Rita Chu, in the November 2010 issue of Law Firm Partnership & Benefits Report.)

Research Tax Credit

The 2010 Tax Relief Act renewed the research tax credit for 2010 and 2011. It had been due to expire at the end of 2009. Coupled with the provisions of the Small Business Jobs and Credit Act of 2010, the research credit is especially attractive in that it (as well as other eligible business credits) may now be used to offset not only regular tax, but Alternative Minimum Tax (AMT) as well.

Employer-Provided Benefits

Law firms that provide child-care facilities for their employees continue to be eligible for a tax credit based upon a 25% of qualified costs (up to $150,000 annually) through 2012. In addition, law firms may continue to deduct up to $5,250 annually for qualified education expenses paid on behalf of an employee through Dec. 31, 2012. This amount also continues to be tax-free to the employee.

Employer-provided transit benefits (including vanpool and parking) have been extended for one year through Dec. 31, 2011 at a monthly maximum of $230. These benefits may be realized as either a tax-free fringe benefit offered by law firms or as a pre-tax benefit when paid for by the employee.

Business Tax Extenders

The 2010 Tax Relief Act extends various business tax provisions that had expired at the end of 2009, for another two years through Dec. 31, 2011. Some that are noteworthy for law firms and their clients are: 1) A 15-year recovery period for qualified leasehold improvements, restaurant building and improvements, and retail improvements; 2) Expensing election for certain film and television production costs; 3) Charitable deduction for contributions of food inventory; 4) Charitable deduction for contributions by C corporations of books to public schools; and 5) Charitable deduction for contributions by corporations of computer equipment for educational purposes.

Tax Rates

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the individual and estate/trust income tax rates had been scheduled to revert after Dec. 31, 2010 from their current levels to the pre-Bush higher tax rates. The 2010 Tax Relief Act postpones this reversion for another two years, through Dec. 31, 2012.

Similarly, long-term capital gains and qualified dividends in 2010 were taxed at a maximum rate of 15%. The top rate on long-term capital gains had been scheduled to rise to 20% after Dec. 31, 2010, while qualified dividends were scheduled to lose their special “qualified” status, in effect rendering them subject to regular income tax rates with a maximum of 39.6%. The 2010 Tax Relief Act extends the maximum 15% rate on both categories for another two years.

A law firm or its client who is planning to structure an installment sale prior to Dec. 31, 2012 should be aware that principal payments received after Dec. 31, 2012 will be subject to the higher 20% rate even though the actual sale took place prior to that date.

Itemized Deduction Limitation and Personal
Exemption Phaseout

Prior to 2010, high-income level law firm partners and their clients had their itemized deductions reduced and personal exemptions either reduced or phased out under special formulas linked to the amount of the individual's Adjusted Gross Income (AGI). These limitations were fully repealed in 2010, but were scheduled to return in full after 2010. The 2010 Tax Relief Act delays the return of these limitations for another two years until after 2012.

Marriage Penalty Relief

EGTRRA had provided temporary relief from the so-called marriage penalty by increasing both the basic standard deduction and lowest tax bracket for a married couple filing a joint return. The 2010 Tax Relief Act extends these marriage penalty relief provisions for another two years, through Dec. 31, 2012.

Child Tax Credit and Dependent Care Credit

The 2010 Tax Relief Act extends the $1,000 child tax credit through Dec. 31, 2012, including its allowance against the Alternative Minimum Tax (AMT). By the same token, enhanced amounts and percentages used to compute the Dependent Care Credit (up to $3,000 per child, maximum $6,000 for more than one qualifying child) have also been extended through Dec. 31, 2012.

Education

The following education provisions have been extended through Dec. 31, 2012 (unless otherwise indicated) by the 2010 Tax Relief Act: 1) The American Opportunity Tax Credit (AOTC), formerly known as the HOPE Credit. Maximum annual credit that can be claimed is $2,500 per eligible student. The AOTC can be claimed for all four years of postsecondary education, while the old HOPE credit was limited to the first two years; 2) Enhanced student loan interest deduction ($2,500 annual maximum); 3) Enhancements to Coverdell Education Savings Accounts ($2,000 maximum annual contribution); 4) Exclusion from income of various qualified scholarships; 5) Higher education tuition deduction (through 2011 only). Maximum annual deductions from $2,000 to $4,000, depending on the amount of the taxpayer's AGI; and 6) Teacher's $250 classroom expense deduction (through 2011 only).

Alternative Minimum Tax (AMT)

The 2010 Tax Relief Act provides an AMT “patch” for 2010 and 2011 by increasing exemption amounts across the board for all filing levels. This “patch” will effectively exempt an estimated 21 million households from the AMT.

Other Individual Tax Incentives

Other individual tax incentives that have been extended through Dec. 31, 2011 include: 1) State and local sales tax deduction; 2) Direct charitable contribution of IRA proceeds ($100,000 maximum); and 3) Enhanced Nonbusiness Energy Property Credit (but limitations revert back to 2008 levels (maximum lifetime credit of $500)).

Payroll Tax Cut

The 2010 Tax Relief Act reduces law firm employees' share of Social Security taxes from 6.2% to 4.2% for wages earned during calendar year 2011 up to the taxable wage base of $106,800. Self-employed attorneys will pay 10.4% on self-employment income up to the taxable wage base. There are no changes to the Medicare portion. As such, the total Social Security tax percentage withheld on an employee in 2011 will amount to 5.65% (down from 7.65%), while the total percentage paid by a self-employed individual will amount to 13.3% (down from 15.3%). Regardless of this reduction, self-employed attorneys will still calculate the 1/2 self-employment tax deduction on Form 1040 based upon the 15.3%.

It should be noted that the 6.2% payroll tax forgiveness for law firms that employ new hires under the HIRE Act ended after Dec. 31, 2010 and is not extended under the 2010 Tax Relief Act. However, the $1,000 retained employee credit (for new hires employed for 52 consecutive weeks) remains in effect since it was never scheduled for sunset under the HIRE Act. (For a more detailed discussion of the HIRE Act and the retained employee credit, please see “The HIRE Act and the Health Care Reform Acts” by Richard H. Stieglitz and Tamir Dardashtian in the June 2010 issue of Law Firm Partnership & Benefits Report.)

Qualified Small Business Stock

The 2010 SBJC Act enhanced the exclusion of gain from qualified small business stock by increasing the exclusion of gain from 50% to 100% for stock acquired between Sept. 28, 2010 and Dec. 31, 2010, and held for at least five years. The 2010 Tax Relief Act extends the 100% exclusion for one more year, for stock acquired through Dec. 31, 2011. (See article by Stieglitz and Chu in the Nov. 2010 issue for a more detailed discussion of qualified small business stock).

Estate Tax

The EGTRRA of 2001 gradually reduced over a period of years and then abolished the federal estate tax for decedents dying in 2010. The pre-EGTRRA estate tax, with a maximum tax rate of 55% and a $1 million exemption, was scheduled to be reinstituted after 2010. The 2010 Tax Relief Act does indeed revive the tax, but at a lower maximum tax rate (35%) and a significantly higher exemption ($5 million). These favorable figures are only temporary and are scheduled to sunset on Dec. 31, 2012.

In conjunction with the revival of the estate tax for decedents dying after 2010, the Tax Relief Act reinstituted the stepped-up basis rule which had existed until 2010 and which was replaced by the modified carryover basis rule. “Stepped-up basis” means that property of a decedent will receive a basis equal to the property's fair market value on the date of death or an alternate valuation date. The modified carryover basis rule, applicable for decedents dying in 2010, is that the basis of estate property may be increased to Fair Market Value only up to a maximum of $1.3 million. The balance of the property must be assigned a carryover basis equal to the lesser of the decedent's basis or the fair market value on the date of the decedent's death. The $1.3 million may be increased by an additional $3 million for assets passing to a surviving spouse.

Estate attorneys will now have to retroactively plan for their clients that passed away in 2010. For decedents dying in 2010, the 2010 Tax Relief Act gives the estates the option of either: 1) applying the new estate tax based on the 35% top rate and $5 million exemption amount, and receiving a stepped up basis for the assets of the estate; or 2) no estate tax and applying the modified carryover basis rules.

The 2010 Tax Relief Act provides for portability between spouses of the estate tax $5 million exemption. With a proper election on a timely filed estate tax return, this would allow a surviving spouse to take advantage of the unused portion of the exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount. Thus, with proper planning using the unlimited marital deduction, married couples can effectively shield up to $10 million from estate tax. However, this provision is scheduled to sunset on Jan. 1, 2013 which means that it is only applicable to situations where both spouses die within the two-year period from 2011 through 2012.

Under EGTRRA's sunset provisions, the state death tax credit, which was replaced in 2005 with a deduction, was to have been revived for decedents dying after 2010. The 2010 Tax Relief Act extends the deduction through 2012. In addition, the Act extends the provision of installment payment of estate tax for closely held businesses.

Gift Tax

For gifts made in 2010, the top tax rate is 35% with a $1 million exemption. For gifts made after 2010, the 2010 Tax Relief Act unifies the gift tax with the estate tax by providing a 35% top gift tax rate and a $5 million exemption. Estate attorneys will have to plan for their clients because the increased exemption and the portability of the estate tax exemption between spouses expires after 2012. As such, in order to maximize the $10 million exemption estate attorney clients may have to gift up to the increased exemption prior to it sunsetting. The $13,000 annual gift tax exclusion remains the same for 2010 and 2011.

Generation Skipping Tax (GST)

As under the estate tax, the 2010 Tax Relief Act provides a $5 million GST exemption for 2010 with a GST tax rate of zero. For transfers made after 2010, the GST would be equal to the highest estate and gift tax rate in effect for the year (35% for 2011 and 2012). There is no portability, however, of the GST exemption between spouses.

Summary

The 2010 Tax Relief Act provides for the extension of many favorable tax cuts that may provide law firms, their partners, staff and clients with unique planning opportunities over the next two years. In addition, the estate and gift tax provisions provide a two year window of enhanced gifting and estate planning for clients. The effective dates for these various provisions vary. Therefore, they should be examined very closely to determine the benefits to each taxpayer's specific situation.

Richard H. Stieglitz, CPA, a member of this newsletter's Board of Editors, is a Tax Partner and Zachary H. Zimmet, CPA, is a Tax Manager in the New York accounting firm of Anchin, Block & Anchin LLP, which specializes in providing accounting, tax, and consulting services to law firms. Mr. Stieglitz can be reached at 212-840-3456 or via e-mail at [email protected].

After much wrangling among members of Congress, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) on Dec. 17, 2010. The new law, estimated at a cost of $800 billion, contains numerous tax incentives and relief provisions that will directly or indirectly affect law firms, partners, their staffs and their clients. It extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years, provides for an AMT “patch,” a one-year payroll tax cut, 100% bonus depreciation through 2011 and 50% bonus depreciation for 2012, a top federal estate tax of 35% with a $5 million exemption, and more. The following are highlights of these provisions:

Enhanced Bonus Depreciation

The 2010 Tax Relief Act boosts 50% bonus depreciation to 100% for qualified investments made after Sept. 8, 2010 and before Jan. 1, 2012. The new law also makes 50% bonus depreciation available for qualified property placed in service at any time in 2012.

Generally speaking, qualified property for Bonus Depreciation is defined as new property (original use must begin with the law firm or the client claiming the deduction) with a MACRS recovery period of 20 years or less. It includes most machinery, equipment, computer software, and furniture and fixtures. For 2010 and 2011, it also includes 15-year qualified leasehold improvements.

One hundred percent Bonus Depreciation is not to be confused with Code Section 179 Expensing, which follows its own set of rules. Bonus Depreciation is generally less restrictive than Sec. 179 Expensing in that it is not subject to dollar and investment limits, and is not subject to taxable income limitations. On the other hand, Sec. 179 Expensing applies to used as well as new property.

Code Section 179 Expensing

The 2010 Small Business Jobs and Credit Act (SBJC), signed into law on Sept. 27, 2010, had increased the Code Sec. 179 dollar and investment limits to $500,000 and $2 million, respectively, for tax years beginning 2010 and 2011. For 2012 only, the 2010 Tax Relief Act provides for a $125,000 dollar limit and a $500,000 investment limit. After 2012, unless the provisions of the 2010 Tax Relief Act are extended, the dollar and investment limits are scheduled to revert back to $25,000 and $200,000 respectively.

The 2010 Tax Relief Act also extends the treatment of off-the-shelf computer software as qualifying property if placed in service before 2013. The new law, however, does not extend the Sec. 179 provisions to qualified real property placed in service after Dec. 31, 2011.

(For a more detailed discussion of Code Section 179 Expensing as well as Bonus Depreciation, please see “Provisions of the Small Business Jobs and Credit Act of 2010,” by Richard H. Stieglitz and Rita Chu, in the November 2010 issue of Law Firm Partnership & Benefits Report.)

Research Tax Credit

The 2010 Tax Relief Act renewed the research tax credit for 2010 and 2011. It had been due to expire at the end of 2009. Coupled with the provisions of the Small Business Jobs and Credit Act of 2010, the research credit is especially attractive in that it (as well as other eligible business credits) may now be used to offset not only regular tax, but Alternative Minimum Tax (AMT) as well.

Employer-Provided Benefits

Law firms that provide child-care facilities for their employees continue to be eligible for a tax credit based upon a 25% of qualified costs (up to $150,000 annually) through 2012. In addition, law firms may continue to deduct up to $5,250 annually for qualified education expenses paid on behalf of an employee through Dec. 31, 2012. This amount also continues to be tax-free to the employee.

Employer-provided transit benefits (including vanpool and parking) have been extended for one year through Dec. 31, 2011 at a monthly maximum of $230. These benefits may be realized as either a tax-free fringe benefit offered by law firms or as a pre-tax benefit when paid for by the employee.

Business Tax Extenders

The 2010 Tax Relief Act extends various business tax provisions that had expired at the end of 2009, for another two years through Dec. 31, 2011. Some that are noteworthy for law firms and their clients are: 1) A 15-year recovery period for qualified leasehold improvements, restaurant building and improvements, and retail improvements; 2) Expensing election for certain film and television production costs; 3) Charitable deduction for contributions of food inventory; 4) Charitable deduction for contributions by C corporations of books to public schools; and 5) Charitable deduction for contributions by corporations of computer equipment for educational purposes.

Tax Rates

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the individual and estate/trust income tax rates had been scheduled to revert after Dec. 31, 2010 from their current levels to the pre-Bush higher tax rates. The 2010 Tax Relief Act postpones this reversion for another two years, through Dec. 31, 2012.

Similarly, long-term capital gains and qualified dividends in 2010 were taxed at a maximum rate of 15%. The top rate on long-term capital gains had been scheduled to rise to 20% after Dec. 31, 2010, while qualified dividends were scheduled to lose their special “qualified” status, in effect rendering them subject to regular income tax rates with a maximum of 39.6%. The 2010 Tax Relief Act extends the maximum 15% rate on both categories for another two years.

A law firm or its client who is planning to structure an installment sale prior to Dec. 31, 2012 should be aware that principal payments received after Dec. 31, 2012 will be subject to the higher 20% rate even though the actual sale took place prior to that date.

Itemized Deduction Limitation and Personal
Exemption Phaseout

Prior to 2010, high-income level law firm partners and their clients had their itemized deductions reduced and personal exemptions either reduced or phased out under special formulas linked to the amount of the individual's Adjusted Gross Income (AGI). These limitations were fully repealed in 2010, but were scheduled to return in full after 2010. The 2010 Tax Relief Act delays the return of these limitations for another two years until after 2012.

Marriage Penalty Relief

EGTRRA had provided temporary relief from the so-called marriage penalty by increasing both the basic standard deduction and lowest tax bracket for a married couple filing a joint return. The 2010 Tax Relief Act extends these marriage penalty relief provisions for another two years, through Dec. 31, 2012.

Child Tax Credit and Dependent Care Credit

The 2010 Tax Relief Act extends the $1,000 child tax credit through Dec. 31, 2012, including its allowance against the Alternative Minimum Tax (AMT). By the same token, enhanced amounts and percentages used to compute the Dependent Care Credit (up to $3,000 per child, maximum $6,000 for more than one qualifying child) have also been extended through Dec. 31, 2012.

Education

The following education provisions have been extended through Dec. 31, 2012 (unless otherwise indicated) by the 2010 Tax Relief Act: 1) The American Opportunity Tax Credit (AOTC), formerly known as the HOPE Credit. Maximum annual credit that can be claimed is $2,500 per eligible student. The AOTC can be claimed for all four years of postsecondary education, while the old HOPE credit was limited to the first two years; 2) Enhanced student loan interest deduction ($2,500 annual maximum); 3) Enhancements to Coverdell Education Savings Accounts ($2,000 maximum annual contribution); 4) Exclusion from income of various qualified scholarships; 5) Higher education tuition deduction (through 2011 only). Maximum annual deductions from $2,000 to $4,000, depending on the amount of the taxpayer's AGI; and 6) Teacher's $250 classroom expense deduction (through 2011 only).

Alternative Minimum Tax (AMT)

The 2010 Tax Relief Act provides an AMT “patch” for 2010 and 2011 by increasing exemption amounts across the board for all filing levels. This “patch” will effectively exempt an estimated 21 million households from the AMT.

Other Individual Tax Incentives

Other individual tax incentives that have been extended through Dec. 31, 2011 include: 1) State and local sales tax deduction; 2) Direct charitable contribution of IRA proceeds ($100,000 maximum); and 3) Enhanced Nonbusiness Energy Property Credit (but limitations revert back to 2008 levels (maximum lifetime credit of $500)).

Payroll Tax Cut

The 2010 Tax Relief Act reduces law firm employees' share of Social Security taxes from 6.2% to 4.2% for wages earned during calendar year 2011 up to the taxable wage base of $106,800. Self-employed attorneys will pay 10.4% on self-employment income up to the taxable wage base. There are no changes to the Medicare portion. As such, the total Social Security tax percentage withheld on an employee in 2011 will amount to 5.65% (down from 7.65%), while the total percentage paid by a self-employed individual will amount to 13.3% (down from 15.3%). Regardless of this reduction, self-employed attorneys will still calculate the 1/2 self-employment tax deduction on Form 1040 based upon the 15.3%.

It should be noted that the 6.2% payroll tax forgiveness for law firms that employ new hires under the HIRE Act ended after Dec. 31, 2010 and is not extended under the 2010 Tax Relief Act. However, the $1,000 retained employee credit (for new hires employed for 52 consecutive weeks) remains in effect since it was never scheduled for sunset under the HIRE Act. (For a more detailed discussion of the HIRE Act and the retained employee credit, please see “The HIRE Act and the Health Care Reform Acts” by Richard H. Stieglitz and Tamir Dardashtian in the June 2010 issue of Law Firm Partnership & Benefits Report.)

Qualified Small Business Stock

The 2010 SBJC Act enhanced the exclusion of gain from qualified small business stock by increasing the exclusion of gain from 50% to 100% for stock acquired between Sept. 28, 2010 and Dec. 31, 2010, and held for at least five years. The 2010 Tax Relief Act extends the 100% exclusion for one more year, for stock acquired through Dec. 31, 2011. (See article by Stieglitz and Chu in the Nov. 2010 issue for a more detailed discussion of qualified small business stock).

Estate Tax

The EGTRRA of 2001 gradually reduced over a period of years and then abolished the federal estate tax for decedents dying in 2010. The pre-EGTRRA estate tax, with a maximum tax rate of 55% and a $1 million exemption, was scheduled to be reinstituted after 2010. The 2010 Tax Relief Act does indeed revive the tax, but at a lower maximum tax rate (35%) and a significantly higher exemption ($5 million). These favorable figures are only temporary and are scheduled to sunset on Dec. 31, 2012.

In conjunction with the revival of the estate tax for decedents dying after 2010, the Tax Relief Act reinstituted the stepped-up basis rule which had existed until 2010 and which was replaced by the modified carryover basis rule. “Stepped-up basis” means that property of a decedent will receive a basis equal to the property's fair market value on the date of death or an alternate valuation date. The modified carryover basis rule, applicable for decedents dying in 2010, is that the basis of estate property may be increased to Fair Market Value only up to a maximum of $1.3 million. The balance of the property must be assigned a carryover basis equal to the lesser of the decedent's basis or the fair market value on the date of the decedent's death. The $1.3 million may be increased by an additional $3 million for assets passing to a surviving spouse.

Estate attorneys will now have to retroactively plan for their clients that passed away in 2010. For decedents dying in 2010, the 2010 Tax Relief Act gives the estates the option of either: 1) applying the new estate tax based on the 35% top rate and $5 million exemption amount, and receiving a stepped up basis for the assets of the estate; or 2) no estate tax and applying the modified carryover basis rules.

The 2010 Tax Relief Act provides for portability between spouses of the estate tax $5 million exemption. With a proper election on a timely filed estate tax return, this would allow a surviving spouse to take advantage of the unused portion of the exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount. Thus, with proper planning using the unlimited marital deduction, married couples can effectively shield up to $10 million from estate tax. However, this provision is scheduled to sunset on Jan. 1, 2013 which means that it is only applicable to situations where both spouses die within the two-year period from 2011 through 2012.

Under EGTRRA's sunset provisions, the state death tax credit, which was replaced in 2005 with a deduction, was to have been revived for decedents dying after 2010. The 2010 Tax Relief Act extends the deduction through 2012. In addition, the Act extends the provision of installment payment of estate tax for closely held businesses.

Gift Tax

For gifts made in 2010, the top tax rate is 35% with a $1 million exemption. For gifts made after 2010, the 2010 Tax Relief Act unifies the gift tax with the estate tax by providing a 35% top gift tax rate and a $5 million exemption. Estate attorneys will have to plan for their clients because the increased exemption and the portability of the estate tax exemption between spouses expires after 2012. As such, in order to maximize the $10 million exemption estate attorney clients may have to gift up to the increased exemption prior to it sunsetting. The $13,000 annual gift tax exclusion remains the same for 2010 and 2011.

Generation Skipping Tax (GST)

As under the estate tax, the 2010 Tax Relief Act provides a $5 million GST exemption for 2010 with a GST tax rate of zero. For transfers made after 2010, the GST would be equal to the highest estate and gift tax rate in effect for the year (35% for 2011 and 2012). There is no portability, however, of the GST exemption between spouses.

Summary

The 2010 Tax Relief Act provides for the extension of many favorable tax cuts that may provide law firms, their partners, staff and clients with unique planning opportunities over the next two years. In addition, the estate and gift tax provisions provide a two year window of enhanced gifting and estate planning for clients. The effective dates for these various provisions vary. Therefore, they should be examined very closely to determine the benefits to each taxpayer's specific situation.

Richard H. Stieglitz, CPA, a member of this newsletter's Board of Editors, is a Tax Partner and Zachary H. Zimmet, CPA, is a Tax Manager in the New York accounting firm of Anchin, Block & Anchin LLP, which specializes in providing accounting, tax, and consulting services to law firms. Mr. Stieglitz can be reached at 212-840-3456 or via e-mail at [email protected].