With the passage of HR 4853 – officially, the ‘Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010’ – the Bush Tax cuts which were set to expire in two weeks get a new lease on life. As Steven Colbert said, “I can’t wait to have my taxes be exactly the same as they were.” Of course, not everything got extended, and some new provisions snuck in, so it’s worth breaking the bill down, and taking a look at its parts.

In Part I, we’ll take a look at Titles I, II and III, dealing with the Bush Tax Cuts, AMT exemptions and the new Estate Tax rules. In Part II, we’ll look at Titles IV, V and VI, which deal with the extension of investment incentives, the extension of unemployment benefits, and the Payroll tax cuts. Then, in Part III, we’ll cover Title VII, by far the largest portion of the bill. So, without further adieu….here we go:

Title I – Temporary Extension of Tax Relief

This title does three things:

First, it extends, through 2012, the tax cuts made in the Economic Growth and Tax Relief Reconciliation act of 2001 (EGTRRA), better known as the Original Bush Tax Cuts. Furthermore, it extends the Adoption Credit, which had been extended through 2011 by the Patient Protection and Affordable Care Act (i.e., the recently enacted “Healthcare Bill” that the Republicans want to quash), through 2012.

Second, it extends the cuts under the Job Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) through 2012.

Finally, it extends some – but not all – of the cuts in the American Recovery and Reinvestment Act of 2009. Surviving are the American Opportunity Tax credit (which replaced the Hope Credit), the increased ($3,000) Child Tax Credit, and the increase in the Earned Income Tax Credit, all of which are kept through 2012. Not so lucky – the First Time Home Buyer Credit, the Making Work Pay Credit (an Obama favorite), the allowance of computers as a qualified 529 plan expense (sorry, kid, no laptop for school!), the suspension of tax on the first $2,400 of unemployment compensation, and the additional deduction for state sales tax on car purchases.

Title II – Extension of AMT relief

This title, among the shortest in the bill, does two things:

First, it increases the AMT exemption for joint filers and surviving spouses from $70,950 to $72,450 in 2010,  and for singles from $46,700 to$47,450. Beginning in 2011, those amounts climb to $74,450 in 2011, and $48,450, respectively. The sunset provision which had ended the higher rates after 2009, is repealed.

Second, it extends the special provision AMT relief for nonrefundable credits, which was scheduled to end in 2009, through 2011.

This brings us to one of the most hotly contested parts – Title III.

Title III – Estate Tax Relief

(or, what to do about George Steinbrenner and other billionaires)

Two of this Title’s provisions – the reinstatement of a tax on estates over $5.0 million, and a cap on the tax rate at 35% – are well known. But that’s not the biggest surprise – not by a long shot.

One of the biggest questions asked by estate planners during the year has been “if there’s action on the estate tax, will it be retroactive?” As the year has dragged on, it appeared that the answer would be ‘no’. In fact, it’s a resounding YES! That’s right – the bill is retroactive to 12/31/2009, which means that, for estate tax purposes, 2010 is the tax version of Season 8 of ‘Dallas’ – you remember, the one that turned out to be nothing more than a dream.

Except this isn’t a dream, it’s reality, and a number of millionaires and billionaires have already died this year. So the big question becomes: what about their estates? Glad you asked. They get an option (actually, everyone does): they can take advantage of the 2010 law as originally written – no estate tax, carryover basis with step ups limited to $1.0 million – or they can take what’s behind door #2: automatic step up in basis, a $5.0 million exemption and a top rate of 35%.

Actually, it’s not really a choice – unless the Bush version is elected on a timely filed (including extensions) return, the estate is automatically covered under the new exemption & tax. The deadline for filing is 9 months after enactment (or around mid-September), so there is plenty of time to determine which plan is better, in the long run. But be warned – if you file late, you lose the opportunity to choose. And once elected, it cannot be revoked without permission from the IRS.

Some other provisions:

The gift tax rate is now reunited with the estate tax rate. EGTRRA had de-coupled these, but they are now reunited. The downside? Because they were not in lockstep for several years, any eligible gift made in a year which differs from the current rates needs to be re-evaluated at current rates in order to calculate the unified credit. Yikes.

On the upside, trust transfers that were once taxable are no longer included, and there is no Generation Skipping Transfer Tax for 2010.

Finally, the much desired portability rule – which allows one spouse to use the unused portion of their deceased spouse’s credit – is here, allowing a surviving spouse to shield up to $10.0 million of assets. In fact, the bill appears to allow a surviving spouse of a surviving spouse (still with me here?) to use the original spouse’s credit, though it appears unlikely to actually happen. Most important, though, is the requirement of a timely filed estate return in order to take advantage of the rule. File a late return, lose the option of portability – a stiff penalty, indeed.

Be warned, though: In order to enforce the provision, the IRS can audit the estate tax returns of deceased spouses, even if the statute of limitations for assessments has passed. So, for estate tax returns, at least, the ‘six year rule’ no longer applies.

Ok, that’s enough to digest for now. More on the bill later.