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The New Tax Law: Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

President Obama is expected to quickly sign, a multi-billion dollar tax cut package, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) (H.R. 4853). The new law follows through on the framework agreed to December 6 by President Obama and GOP leaders in Congress. The 2010 Tax Relief Act provides for a top federal estate tax rate of 35 percent with a $5 million exclusion, and more. The 2010 Tax Relief Act revives the estate tax for decedents dying after December 31, 2009, but at a significantly higher level than had been scheduled after 2010 under the old law. The maximum estate tax rate is 35 percent with an exclusion amount of $5 million. This new estate tax regime, however, is itself temporary and is scheduled to sunset on December 31, 2012.

Portability

The 2010 Tax Relief Act provides for “portability” between spouses of the maximum exclusion. Generally, portability would allow a surviving spouse to elect to take advantage of the unused portion of the estate tax exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount. A deceased spousal exclusion amount would be available to the surviving spouse only if an election is made on a timely filed estate tax return. Portability would be available after December 31, 2010.  With the election and careful estate planning, married couples can effectively shield up to $10 million from estate tax by providing that each spouse maximize his or her $5 million exemption under the 2010 Tax Relief Act.

Gift Taxes

For gifts made in 2010, the 2010 Tax Relief Act provides that gift tax is computed using a rate schedule having a top tax rate of 35 percent and a maximum applicable exclusion amount of $1 million. For gifts made after 2010, the gift tax is reunified with the estate tax with a top gift tax rate of 35 percent and a maximum applicable exclusion amount of $5 million.  Many of our clients will be taking advantage of this unprecedented opportunity to be able to make tax-free gifts to their children or others of as much as $10 million, an increase from the current limit of $2 million, under the new tax-cut law.