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GainsKeeper Blog

Tax Act Extends Low Maximum Long-Term Capital Gains and Qualified Dividend Income Tax Rates for Two More Years and Addresses Basis Step-Up on Inheritance

WALTHAM, Mass. – Dec. 20, 2010 – On Dec. 17, 2010, President Obama signed into law the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (Tax Relief Act, H.R. 4853) extending the Bush era tax cuts an additional two years—through calendar 2012. Thus, the maximum federal income tax rate during 2011 and 2012 for long-term capital gains remains 15 percent. Similarly, the maximum federal income tax rate during 2011 and 2012 applicable to qualified dividend income remains 15 percent.

The adjusted cost basis of securities is used to determine the amount of gain or loss recognized upon sale or disposition that is potentially subject to federal income tax. The tax law includes special rules that applied under Internal Revenue Code Section 1014 to determine the cost basis of securities in the hands of a recipient when received from a decedent upon death. In general, Code Sec. 1014 provided that the recipient’s cost basis in securities received from a decedent was “stepped up” to the fair market value of such securities determined as of the date of death (or the alternative 6-month valuation date if elected). In connection with the Bush era tax cuts enacted in 2001, a new subsection (f) was added to Code Sec. 1014 that set forth a “sunset date” and provided that this stepped-up basis rule was scheduled to expire at the end of Dec. 31, 2009. It would have been replaced by a new more complex rule under Code Sec. 1022 that generally did not provide for the step-up in basis to fair market value for estates if the basis increase exceeded $1.3 million (with a special rule for transfers to a surviving spouse).

Section 301 of the Act provides that “Each provision of law amended by subtitle A or E of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 is amended to read as such provision would read if such subtitle had never been enacted.” The sunset date added to Code Sec. 1014 was added pursuant to Section 541 of the 2001 Act (as part of subtitle E of the 2001 Act). Thus, the sunset date was essentially retroactively eliminated. As a result, the stepped up basis rules of Code Sec. 1014 generally retroactively apply for property received from decedents during 2010 and thereafter.

The Tax Relief Act also addressed the estate tax, gift tax and transfer tax rates, rules and related provisions. Here the changes are more complex and significant. It should be noted that in connection with other estate tax rules, the executor filing tax returns for a taxpayer’s estate for a taxpayer that died during 2010 could elect to apply the more complex rules of Code Sec. 1022 in lieu of the “step-up” rule of Sec. 1014. The considerations relating to such an election, as well as these changes, are not discussed here.


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