2010 Tax Relief Act

Last week was a monumental week for US tax practitioners.  On Friday, December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (affectionately known as the “2010 Tax Relief Act” or “TRUIRJCA”).  While it does not provide long-term certainty, Americans (and Canadians with permanent establishments in the US) can at least be assured that for the next two years, individual and corporate tax rates will remain at 2001 levels.  Additionally, dividend rates (which were scheduled to increase to ordinary income rates) and capital gains rates (scheduled to increase to 20 percent) will likewise remain at the 15 percent 2001 rate.  Other notable changes to the income tax include an increase in the exemption amount for the alternative minimum tax and a decrease to the employee-share of a portion of Social Security taxes from 6.2 percent to 4.2 percent.  Finally, businesses are allowed a 100-percent deduction for qualified property purchased between September 9, 2010, and December 31, 2011, that they were previously required to amortize and depreciate.

On December 6, 2010, President Barack Obama of the United States announced a potential agreement with the opposition Republicans that would result in an extension of the Bush era tax cuts and a compromise on the US estate tax for two years which appears to commence January 1, 2011.  Of major interest to clients and friends of our firm is that the US estate tax, pursuant to the terms of the deal, would have a top tax rate of 35% and a $5M exemption for US citizens.  The proposed provisions of the US estate tax appear to be what the Republicans were hoping for (and better than the 2009 estate tax rate of 45% and the exemption of $3.5M) and therefore this appears to be a significant concession on the Democrat part.  It has been reported that Obama was not happy with the estate tax compromise.  In addition, long term capital gains and dividend rates are to remain at 15%.  Both rates are scheduled to rise if a deal is not reached. 

As you may be aware, a US person (US citizen or resident, US partnership, US corporation or US estate or trust) has an obligation to file a Report of Foreign Bank and Financial Account (FBAR) if that person has a financial interest in or signature authority (or comparable authority) in one or more accounts in a foreign country if the aggregate value of those accounts exceeds $10,000 USD at any time during the calendar year.  However, what you may not know is that starting with the 2011 tax year under the Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”) and Internal Revenue Code section 6038D, there is now an additional requirement for an individual who holds an interest in a “specified foreign financial asset” to disclose information on each such asset if the aggregate value of all the individual’s specified foreign financial assets exceeds $50,000 USD.  This disclosure is done on a form which will be attached to the individual’s income tax return.  In addition, “individual” refers to any US entity which holds directly or indirectly non-US financial assets.  Lastly, if the Secretary determines that an individual has an interest in one or more “specified foreign financial assets” but fails to provide sufficient information to determine whether the $50,000 USD threshold has been met, then the aggregate value will be assumed to be greater than the $50,000 USD threshold for purposes of assessing penalties.