The "EGTRRA sunsets" will soon come to the fore in Washington, and although much of the attention has focused on how tax rates would be affected, the looming sunsets would eliminate or substantially alter many more tax provisions. Although Congress may defer EGTRRA sunset provisions or modify them for 2012, there's no guarantee this will happen, or that all of the sunsets will get some kind of reprieve. To help you get a better handle on exactly what is at stake with the EGTRRA problem, we've prepared a scorecard of what will change beginning after 2012, under current law.
Background. Unless Congress acts, 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 2012. In the case of Title V of EGTRRA, relating to estate, gift and generation skipping transfer taxes, the EGTRRA provisions sunset and won't apply to estates of decedents dying, gifts made, or generation skipping transfers, after 2012. The Internal Revenue Code of '86 will be applied and administered to tax or limitation years beginning after 2012, and to estates of decedents dying, gifts made, or generation skipping transfers, after 2012 as if the provisions of, and amendments made by, EGTRRA had never been enacted.
Thus, upon sunset of EGTRRA, the Code would revert to its status before EGTRRA's enactment, except for those provisions made permanent or extended by subsequent legislation (e.g., the Pension Protection Act of 2006 (PL 109-280) repealed the sunset provisions of PL 107-16 as they relate to pension and IRA provisions and qualified tuition plans).
Post-2012 Changes under EGTRRA Sunset Rules
Here's a condensed review of what's in store if the EGTRRA sunset rules go into effect.
Tax brackets (Code Sec. 1(f), Code Sec. 1(i)). Three fundamental changes will occur under EGTRRA:
(1) The 10% bracket disappears (the lowest bracket is 15%).
(2) 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.
(3) The top four brackets rise from 25%, 28%, 33% and 35% to 28%, 31%, 36% and 39.6%.
Note that under EGTRRA, after 2004, the maximum AMT exemption amounts were to have reverted to their pre-2001 levels of $45,000 (joint filers & surviving spouses), $33,750 (unmarried individuals) and $22,500 (marrieds filing separately). However, 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 $45,000, $33,750, and $22,500.
Taxation of capital gains and qualified dividends (Code Sec. 1(h)). Long-term capital gain is 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.
Note that the sunset rules related to taxation of capital gains and dividends applies under Sec. 303 of P.L. 108-27, as modified by Sec. 102 of PL 109-222, not under EGTRRA, but are included in this article because they impact an important tax rate.
Coverdell Education Saving Accounts (CESAs), formerly called education IRAs (Code Sec. 530). A number of changes apply:
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The annual per-beneficiary contribution limit drops to $500.
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There's a lower phaseout range for marrieds filing jointly.
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A restricted definition of qualifying education expenses (e.g., only for higher education) goes into effect.
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There are no special rules for special needs beneficiaries.
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The rule allowing corporations and other entities to make CESA contributions sunsets.
Exclusion for employer provided educational assistance under Code Sec. 127. The exclusion ends after 2012 (so does the rule that allowed the exclusion for graduate level education).
Payments for teaching or research ( Code Sec. 117(c) ). The exemption from the payments-for-services rule for amounts received under certain Government health professions scholarship programs sunsets after 2012.
Above-the-line student loan interest deduction (Code Sec. 221). 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 ( Code Sec. 45F ). This credit sunsets after 2012.
Earned income tax (EITC) credit ( Code Sec. 32 ). There are multiple changes: (a) The beginning of phaseout range for joint returns drops; (b) phaseout of the credit is computed with reference to modified AGI (rather than AGI); (c) earned income for EITC purposes includes exempt income; and (d) EITC is reduced by the AMT.
Credit for household and dependent care expenses (Code Sec. 21). 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 (Code Sec. 24). 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 Code Sec. 121 homesale exclusion by heirs, estates, and qualified revocable trusts (Code Sec. 121(d)(11)). This tax break is no longer applicable.
Basis of property acquired from a decedent (Code Sec. 1014). After 2012, property acquired from a decedent generally receives a stepped up (i.e., fair market value) basis. This is the case prior to 2012 as well, with the lone exception of decedents dying in 2010. Solely in 2010, to have the stepped-up basis rules not apply, the estate would have had to elect to have the federal estate tax laws treated as repealed.
Minimum withholding rate on supplemental wages under flat rate method (Code Sec. 3402). This rate rises from 25% to 28%. (For supplemental wage payments totaling more than $1 million for a calendar year, the rate rises from 35% to 39.6%).
Backup withholding rate on gambling winnings (Code Sec. 3402). This rate rises from 25% to 28%.
Backup withholding rate on reportable payments (Code Sec. 3406). This rate rises from 28% to 31%.
Standard deduction (Code Sec. 63). 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 ( Code Sec. 68 ). 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 (Code Sec. 151(d)). A higher-income taxpayer's personal exemptions are phased out when AGI exceeds an inflation-adjusted threshold.
Voluntary withholding rate on certain federal payments (e.g., Social Security benefits) (Code Sec. 3402). The rate rises from 7%, 10%, 15%, or 25%, to 7%, 15%, 28%, 31%.
Voluntary withholding rate on unemployment benefits (Code Sec. 3402). This rate rises from 10% to 15%.
Parent's election to include child's unearned income on parent's return ( Code Sec. 1(g)(7)(B)(ii) ). 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).
Unincorporated taxpayer's net capital gain and qualified dividend income taxed for AMT purposes at the same rates that apply for regular tax purposes (Code Sec. 55(b)(3)). This rule no longer applies.
Accumulate earnings tax rate (Code Sec. 532) and personal holding company tax rate (Code Sec. 541). Both rise from 15% to 39.6%.
Gain on transfer of property to satisfy pecuniary bequest (Code Sec. 1040). The estate recognizes gain or loss to extent of difference between bequest dollar amount and estate's basis for the property (gain limited in case of certain special use property).
Transfer at death to nonresident alien (Code Sec. 684(a)). No gain is recognized on transfers of appreciated property.
Estate tax (Code Sec. 2001 et seq.). The estate tax is returned to its state as it was in 2001 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 and (2) reinstated Code Sec. 2057 deduction for family owned businesses.
Generation skipping transfer (GST) tax (Code Sec. 2631). The GST tax is returned to its state as it was in 2001, with top rate of 55%, and the GST exemption amount is set at $1 million.
Gift tax (Code Sec. 2505). The top rate increased to 55%.
Treatment of transfers to non-grantor trusts as taxable gifts under Code Sec. 2503 (Code Sec. 2511(c)). This rule no longer applies.
Installment payment of estate tax (Code Sec. 6166). Installment payment rules are modified.
