Exactly What Tax Provisons Are Set To Expire?


Many of the tax cuts and tax saving provisions implemented during the Bush administration are set to expire at the end of this year.  Although many people have focused on how tax rates would be affected, the fact of the matter is that numerous other tax provisions are also set to expire. 

Many think Congress will act to extend at least some of the tax provisions before the end of the year, but there is no guarantee this will happen. 

To help you get a better handle on exactly what will happen if Congress does not act, below is a list of some of the tax provisons that are set to expire:

Tax Brackets:  Three fundamental changes will occur to tax brackets in 2011:

  • The 10% bracket disappears (the lowest bracket is 15%);
  • The size of the 15% tax bracket for joint filers & qualified surviving spouses is 167% (rather than 200%) of the 15% tax bracket for individual filers;
  • The top four brackets rise from 25%, 28%, 33% and 35% to 28%, 31%, 36% and 39.6%.

Alternative Minimum Tax:  For alternative minimum tax purposes, Congress has postponed this sunset (and increased the exemption figures) multiple times, usually in “extenders” legislation. The last postponement expired at the end of 2009. Thus, unless Congress acts, for 2010, the AMT exemption amounts will be $5,000, $33,750, and $22,500.

Capital Gains:  For 2011, Long-term capital gain will taxed at a maximum rate of 20% (18% for assets held more than five years). Dividends paid to individuals are taxed at the same rates that apply to ordinary income.

Coverdell Education Savings Accounts:  A number of changes will apply:

  • The annual per-beneficiary contribution limit drops to $500;
  • There's a lower phaseout range for marrieds filing jointly;
  • A restricted definition of qualifying education expenses (e.g., only for higher education) goes into effect;
  • There are no special rules for special needs beneficiaries;
  • The rule allowing corporations and other entities to make CESA contributions sunsets.

Exclusion for Employer Provided Educational Assistance:  The exclusion ends after 2010 (so does the rule that allowed the exclusion for graduate level education).

Payments for Teaching and Research:  The exemption from the payments-for-services rule for amounts received under certain Government health professions scholarship programs sunsets after 2010.

Above-The-Line Student Loan Interest Deduction:  The deduction (1) phases out over lower modified AGI ranges and (2) applies only to interest paid during the first 60 months in which interest payments are required.

Credit for Employer-Provided Child Care Facilities:  This credit sunsets after 2010.

Earned Income Tax Credit:  There are multiple changes: (a) The beginning of phaseout range for joint returns drops; phaseout of the credit is computed with reference to modified AGI (rather than AGI); earned income for EITC purposes includes exempt income; and EITC is reduced by the AMT.

Credit for Household and Dependent Care Expenses:  Creditable expenses drops from $3,000 (1 qualifying individual) and $6,000 (2 or more) to $2,400 and $4,800 respectively. The maximum credit percentage drops from 35% to 30%, and the AGI-based percentage reduction begins at $10,000 (instead of $15,000).

Child Credit:  The maximum credit drops from $1,000 to $500 and the credit is not allowed against AMT. Also, more restrictive rules apply to refundable child credit.

Use of Section 121 Homesale Exclusion by Heirs, Estates and Certain Trusts:  This tax break is no longer applicable.

Basis of Property Acquired From Decedent:  After 2010, property acquired from a decedent generally receives a stepped up (i.e., fair market value) basis.

Backup Withholding Rate on Gambling Winnings:  This rate rises from 25% to 28%.

Standard Deduction:  The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) is 167% (rather than 200%) of the standard deduction for single taxpayers.

Reduction in Itemized Deductions:  Most itemized deductions of higher-income taxpayers are reduced by 3% of AGI above an inflation-adjusted figure, but the reduction can't exceed 80%.

Phaseout of Personal Exemptions:  A higher-income taxpayer's personal exemptions are phased out when AGI exceeds an inflation-adjusted threshold.

Parent’s Eletion to Include Child’s Unearned Income on Parent’s Return:  The parent includes child's gross income in excess of an inflation indexed figure, plus 15% (up from 10%) of the lesser of (a) inflation adjusted standard deduction for dependent child, or (b) the excess of the child's gross income over the amount in (a).

Estate Tax:  The estate tax is reinstated with a top rate of 55%. A 5% surtax on the wealthiest of estates phases out the benefit of graduated rates, with (1) a unified credit exemption equivalent of $1 million, (2) reinstated Code Sec. 2057 deduction for family owned businesses, and (3) credit against State death taxes allowed (instead of deduction allowed in 2009 and earlier years).

Generation Skipping Transfer Tax:  The GST tax is reinstated, with top rate of 55%, and the GST exemption amount is set at $1 million.

Gift Tax: The top rate increased to 55%.

Hope this helps.  Remember, Congress may act to extend some of these rules. 

Stay tuned.