Tax Relief Act of 2010: EGTRRA Tax-Cut Rules Extended for Two Years

On December 9, Senate Majority Leader Harry Reid (D-NV) introduced H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Tax Relief Act). The Tax Relief Act contains a two-year extension of the Bush-era tax cuts that was negotiated by the President and Republicans, and significant estate tax relief. However, it also contains a trove of other tax breaks for businesses and individuals. One area of the tax-cut rules to be extended are those under EDTRRA.

Under current law, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, PL 107-16), other than those made permanent or extended by subsequent legislation, sunset and won’t apply to tax or limitation years beginning after 2010. (Sec. 901 of EGTRRA) H.R. 4853 would postpone the Sec. 901 EGTRRA sunset rule for two years. That is, under the Tax Relief Act, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, PL 107-16), other than those made permanent or extended by subsequent legislation, will sunset and will not apply to tax or limitation years beginning after 2012 (instead of 2010). Thus, all of the following favorable tax rules (among others) will remain in place through 2012:

(1) The income tax rates for individuals stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%).

(2) The size of the 15% tax bracket for joint filers & qualified surviving spouses remains at 200% (instead of dropping to 167%) of the 15% tax bracket for individual filers.

(3) The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% (rather than 167%) of the standard deduction for single taxpayers. (The standard deduction for marrieds filing separately is half the joint filer amount.)

(4) Itemized deductions of higher-income taxpayers are not reduced (after 2010 they would have been reduced by 3% of AGI above an inflation-adjusted figure, but reduction couldn’t exceed 80%).

(5) A higher-income taxpayer’s personal exemptions are not phased out when AGI exceeds an inflation-adjusted threshold (they would have been after 2010).

The current, favorable rules for the following tax provisions also will remain in place through 2012: Coverdell Education Saving Accounts (CESAs), formerly called education IRAs; exclusion for employer provided educational assistance under Code Sec. 127; exemption from the payments-for-services rule for amounts received under certain Government health professions scholarship programs; above-the-line student loan interest deduction; credit for employer-provided child care facilities; earned income tax credit (EITC); credit for household and dependent care; and child tax credit.

If you have any questions on the implications of these tax rules, give us a call.

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