President Obama Signs Two-Year Extension of Bush Tax Cuts: Uncertainty Remains

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853).  The Act extends many of the Bush era tax cuts.  The Act extends the Child Care Credit, the Earned Income Credit, and creates a patch for the Alternative Minimum Tax.

Key to estate planning, the Act reinstates the Estate Tax (which had lapsed in 2010) at 35% with a threshold individual exemption of $5 million.  With proper planning, the Act allows a married couple to transfer $10 million to their heirs tax free.  However, because the Act encompasses only two years, a great amount of uncertainty remains and taxpayers must plan accordingly.

One important provision that estate planners will certainly take advantage of is the new gift tax exemption.  During the Bush era, the gift tax exemption was disconnected from the estate tax exemption so that in 2009 the gift tax exemption was only $1 million as opposed to the estate tax threshold of $3.5 million.  For the next two years both exemptions will be set at $5 million.  This will enable couples to gift up to $10 million to their children completely tax free during tax years 2011-2012.

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