Christmas comes early for taxpayers! Two Year Extension of Bush Tax Cuts

Well, not exactly Christmas, but, in a remarkable bit of bipartisan legislation, the Senate and House overwhelmingly passed a two year extension of the otherwise expiring Bush tax cuts.  President Obama signed the legislation on Friday afternoon.

This legislation maintains the income tax status quo for at least the next two years.  However, 2010 remains to be the only year that you can convert an IRA to a Roth IRA and defer the income ratably into 2011 and 2012.  So, it’s back to deferring income and accelerating deductions for most taxpayers.

In addition, there is a two year change to the estate tax, providing for a $5 million estate exemption and 35% tax rate.  While this is not as favorable as the expiring 2010 period when there is no estate tax, it is quite a bit better than many expected.  This new law returns estate planning to more familiar territory last seen in 2009, although with a much higher exemption and lower estate tax rate.  Of note, the legislation has also re-unified the estate, gift, and generation-skipping tax exemption at $5 million beginning January 2011.  This “re-unification” should relieve desires to make taxable gifts before year end and increase gifting plans in the new year.

We think that these extensions, although temporary, will act to improve business and investor confidence by reducing uncertainty and to reinforce the slowly improving recovery which we are experiencing.  We have included a brief market bulletin prepared by J.P. Morgan with their thoughts on the investments and economic implications of this tax compromise.  This bulletin is available here.

Please call us if you have any questions or comments or would like to discuss the implications to your particular circumstances.

May your end of year celebrations be blessed and merry.

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