In anticipation of a changed tax landscape after December 31, 2010, CCH released a Special Tax Briefing on Monday alerting tax practitioners and their clients what to expect in the Tax Code after year-end. CCH is a provider of information services, software and workflow tools for tax, accounting, legal and business professionals.
Absent Congressional action, the report notes, many tax cuts enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) will automatically disappear after December 31, and will be replaced by rates, deductions, credits and other provisions based on the law in place before EGTRRA–which, it notes, was far less generous. In addition, enhanced capital gains and dividends tax rates in the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and subsequent legislation will also sunset after December 31.
While individual, capital gains/dividends and estate tax rate cuts remain the focus of the expiring tax cuts, the CCH report says, EGTRRA made upward of 50 other major changes to the Tax Code that will also sunset. Congress may ignore these entirely, it says, or reevaluate each one case by case. Other EGTRRA changes, notably its sizeable package of pension reform measures, are protected by the Pension Protection Act of 2006 and subsequent legislation.
CCH says the House appears to be looking to the Senate to take the lead on extending EGTRRA. The Senate, however, is hampered by its supermajority rules, and may extend the EGTRRA tax cuts for one or two years, rather than permanently. The timeline for Senate action is also uncertain.
On September 8, Senate Majority Leader Harry Reid, D-Nevada, said he would call a lame-duck session after the November congressional elections, but did not say what legislation he intends to address.
CCH says that under JGTRRA, starting in 2003, and enhanced and extended by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), the maximum rate of tax on the adjusted net capital gain of an individual has been set at a reduced rate of 15% for tax years beginning before January 1, 2011, for both regular tax and AMT. JGTRRA also provided for a 5% rate (subsequently reduced to zero) for taxpayers in the 10% and 15% tax brackets.
Under the sunset provisions of JGTRRA and TIPRA, the maximum rate of tax on the adjusted capital gain of an individual will revert to 20% (except 18% for gains on assets
held more than five years) and the 0% rate will disappear, replaced with a 10% rate (except 8% for gains on assets held longer than five years).
The JGTRRA/TIPRA extension through December 31, 2010, aligned the capital gains (and dividends) tax rate cuts with EGTRRA’s income tax rate cuts so that they share the same sunset date and require coordinated effort to plan income recognition accordingly. Post-2012, planning will be further complicated by the 3.8% unearned income Medicare contribution tax, to be imposed on net investment income above certain amounts.
CCH says individuals should consider the benefits of accelerating capital gains into 2010 while the rates may be lower. Accelerating the sale of capital assets is the general strategy available to accelerate gain. As long as the sale is bona fide and the proceeds are received in 2010, capital gains can be accelerated, it says.
It cautions that installment payments received after 2010 are subject to the tax rates for the year of the payment, not the year of the sale. The capital gains portion of payments made in 2011 and after would be taxed at the 20% rate for taxpayers in the higher income levels.
CCH notes that President Obama has proposed a permanent extension of the 15% and 0% capital gains tax rates for everyone except taxpayers in the two highest income tax rate brackets. For them, he recommends a 20% rate.
A permanent extension of the 0% rate on adjusted capital gain of an individual is unlikely to stimulate significant investment, CCH says. Individuals in the affected tax rate brackets (currently the 10% and 15% rate brackets) are generally not significant investors in capital assets.
Michael S. Fischer ([email protected]) is a New York-based financial writer and editor and a frequent contributor to WealthManagerWeb.com.