The Congress and President wrapped an early Christmas gift in striking a deal on tax reform. The theme appears to be: It doesn’t matter how much all the gift costs as long as everyone gets a present. There is something for everyone, except for State and local governments, and for those concerned about the federal deficit. But the gifts last only one or two years, and once again it is anyone’s guess where tax rates will go next.

Here are the basics on the major provisions of the bill:

1. Estate and Gift. This was the biggest surprise: providing for a $5 million credit ($10 million per couple) and 35% rates on the amounts in excess of the credit. Of particular interest is the unifying of the estate and gift tax exemption amounts at $5 million – a significant change and also a blessed simplifying of the rules. Before this change, in 2009 the credit amount was $3.5 million and the gift exclusion was $1 million. There is no tax for generation skipping transfers made during 2010. According to Joint Committee on Taxation, the generation skipping transfer tax rate for transfers made after 2010 is equal to the highest estate and gift tax rate in effect for such year (i.e 35 percent for 2011 and 2012).
   
   As expected, 2010 estates will be able to make an election to be taxed either under law existing in 2010 or the new law.
   
   Finally, portability of the exemption was included – meaning that the unused portion of the $5 million exempt amount can be transferred to and used by the surviving spouse. This was a common sense provision that greatly simplifies estate planning for married couples.
   
   

2. Income Tax. The tax deal retains all the Bush tax cuts for two years. While most commentators have focused on the Bush tax rates, there were many other provisions in the Bush tax bills, including the child credit, adoption credit, dependent care credit, private activity bonds, and others. All were extended. Also continued are the expanded education credits as well as the child tax credit and the earned income tax credit. The deal also keeps in place the repeal of the hidden marginal tax rate increases that resulted from reductions to itemized deductions and personal exemption for higher income taxpayers.
   
   
3. The AMT patch will prevent many taxpayers from paying more tax under the alternative minimum tax. This provision sunsets at the end of 2011, and so is not for the same period as the extension of the income tax rates. So, expect Congress to deal with this yet again next year for 2012.
   
   
4. Capital Gains and Dividends tax rates are maintained at a 15% rate for two years, as well as the rate structure for lower income brackets.
   
   
5. New asset expensing. As a business incentive to purchase new equipment, there is a provision allowing for 100% bonus first year depreciation of qualified property placed in service after September 8, 2010 and during 2011, reducing to 50% bonus depreciation for property placed in service during 2012 and 2013. For tax years beginning after December 31, 2011, the Section 179 expensing election is set at $125,000 with a $500,000 total asset acquired phase-out, which does not maintain the much more beneficial $500,000 and $2 million phase-out contained in the small business bill passed this Fall.
   
   
6. Payroll Holiday. Social Security taxes for employees (not employers) are cut from 6.2 percent to 4.2 percent. This change is good for one year only in 2011. This benefit also applies to the self-employed as well — reducing the OASDI portion of the self employment tax by two percentage points to 10.4 percent for 2011.
   
   
7. A temporary extension of unemployment insurance, provides continued unemployment benefits to those seeking work.
   
   
8. Energy extenders were added late in the negotiations, extending energy tax breaks that were about to expire to the end of 2011, to make sure all Senators got their own present to take home to their States.
   
   
9. Business extenders. A host of credits/special deductions that expired as of the end of 2009 were extended through 2011. Most notable and applicable to a wide range of businesses are the research and development tax credit and the work opportunity credit.
   
   
10. Individual extenders. A series of deductions for individuals that were set to expire were extended to the end of 2011. These include the deduction of state and local general sales taxes (for those who don’t deduct state income taxes), teachers’ classroom expenses, and a deduction for qualified tuition, among others.
    
    
11. Charitable giving extenders. The rule allowing taxpayers age 70 ½ and older to elect to have tax-free distributions from an IRA made directly to public charities and still satisfy their minimum distribution requirements from their IRAs was revived through 2011. Due to the late passage of the new law, the bill allows taxpayers to make the contribution in January, 2011 and deduct it in 2010 ($100,000 is the annual capped amount that can be transferred to a charity each year).

The one lump of coal went to State and local governments in the elimination of the Build America Bonds. These bonds are effectively no-strings-attached cash grants to State and local governments. These extremely generous bonds have understandably attracted a great deal of attention and concern, including a recent call for a Government Accountability Office investigation by Senator Grassley.

At the end of the day, the tax deal totaled just over $850 billion in tax cuts and spending. It was a huge pile of Christmas presents. Hopefully it will do what its sponsors intended and give a strong push for the economy, which would be even a better present to all of us.