Mary Stangeland, Vice President Wealth Planning at Fifth Third Bank, on the 2010 Tax Relief Act


SOUTHFIELD, Jan. 24, 2011 — President Obama recently signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (often called the 2010 Tax Relief Act) into law. The law extended and expanded a wide variety of valuable tax breaks to all Americans and added new features, including extended unemployment benefits and the return of the qualified charitable distribution (up to $100,000 per year) for IRA account holders over age 70-and-a-half for tax years 2010 and 2011.

These changes late in the year mean that many have to take another look at tax planning not only for 2010, but for 2011 and 2012. What has changed? What do you need to do to estates in limbo? Below is a question and answer session highlighting some key changes and extensions with Mary Stangeland of Fifth Third Private Bank.

What does the new act do to income taxes?

The new act temporarily extends the tax cuts from the Economic Growth and Tax Relief Reconciliation Act of 2001, including the provisions modified by the Jobs and Growth Tax Relief Reconciliation Act of 2003, often called the “Bush Tax Cuts.” The act also extends many provisions of the American Recovery and Reinvestment Act of 2009.  Therefore, it extends ordinary income tax rates and brackets as well as the complete phase out of the limitation on the personal exemption and on itemized deductions through December 31, 2012.

What about the deduction for state and local sales taxes?

The 2010 Tax Relief Act has extended these deductions for 2010 and 2011 (but not for 2012). For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income tax rates or who purchase major items, such as a car or boat.

What does the new act do to the estate, gift and Generation Skipping Transfer (GST) taxes?

The changes to these areas are extremely technical. The act temporarily reinstates the estate and GST taxes retroactive to the beginning of 2010, and modifies the gift tax exemption beginning in 2011. The act also reunifies the gift and estate taxes in 2011 and 2012.

The estate tax is retroactive from the beginning of 2010 through 2012, with a top tax rate of 35 percent, and a $5 million exemption per spouse.  For decedents dying during 2010, the executor of the estate may elect out of the estate tax regime and instead apply former 2010 law – no estate tax and modified carryover basis rules. The $5 million lifetime exemption amount applies for gift taxes beginning January 1, 2011. For 2010, the lifetime gift tax exemption remains $ 1 million.

In 2010, the GST tax rate for transfers is zero percent. The GST exemption is $5 million for 2010 through 2012.  For transfers made after 2010, the GST rate is the highest estate and gift tax rate in effect (35 percent for 2011 and 2012).

The new rules allow greater flexibility in estate planning since the surviving spouse may elect to take over any unused estate or gift tax exemption (but not GST) exemption left from the deceased spouse’s estate, often referred to as “portability” for 2011 and 2012.

What does this do to the Alternative Minimum Tax (AMT)?

Unlike the regular tax system, the AMT is not regularly adjusted for inflation. Instead, Congress has taken a piecemeal approach to adjusting the AMT each year, typically in the form of a “patch” amendment that increases in the AMT exemption. The 2010 Tax Relief Act increases the AMT exemption yet again. This “patch” will be retroactive to January 1, 2010 and will extend through the end of 2011.

For 2010, the exemption amount has been increased to $47,450 for single filers and $72,450 for married couples filing jointly. For 2011, that exemption amount will be increased again to $48,450 for single filers and $74,450 for married couples filing jointly. Despite the continued repeal of the phase out of these deductions, your income tax liability might not decrease due to the AMT.

Note that a large majority of these changes are only valid for two years. Either way, talking to a tax professional to review your situation would be vital. Reviewing your specific tax situation can help you determine whether a particular planning strategy is right for you.

— Mary Stangeland, Vice President Wealth Planning at Fifth Third Bank

Fifth Third Private Bank, a division of Fifth Third Bank, simplifies financial complexity for affluent clients – targeting those with $1 million or more of investable assets – by challenging and collaborating with them to articulate and achieve their goals. With more than 10,000 relationships and more than $22 billion in assets under management, the Private Bank has customized teams of specialized individuals offering wealth planning, investments, risk management, trust services and private banking. Fifth Third Private Bank Wealth Management Advisors quarterback the relationship by getting to know the client and understanding their life, values and financial goals. Headquartered in Cincinnati, Ohio, the Private Bank operates in 12 states: Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina.

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