The North Carolina Senate had announced plans to reveal the new NC tax reform bill in early May. However, the press conference instead produced the outline of a measure that the Senate hopes to turn into a bill later in 2013. Citing pending reports of tax collections from April as part of the bill’s delay, the legislators provided the proposed tax changes that will combine to about $1 billion in tax cuts.Continue Reading...
Parents are allowed to take a federal and state income tax deduction for each dependent child. However, North Carolina proposed Senate Bill 667 (Equalizer Voter Rights) in early April 2013 that will not allow parents to claim their child for state income tax purposes if their child has registered to vote at an address other than where the parent or legal guardian resides.Continue Reading...
2013 seems to be the year of digital afterlife planning. Last month the North Carolina Senate approved Bill 279, a bill for the state’s first-ever laws addressing digital assets. This month Google took their first step forward in post-death account management of their applications. Launching a feature called Inactive Account Manager, Google now offers its users the ability to designate how they wish the data stored on their various Google applications, like Picasa Web Albums, YouTube, Gmail, Blogger, and more, managed after they are gone. Items that do not have inherent financial value, but those that the user chooses to preserve for next of kin.Continue Reading...
What may become part of the “fiscal cliff” drop—and if not, it will be on the 2013 agenda—is the elimination of municipal-bond interest tax breaks. Muni-bond taxes help cover the costs of local utility services, community parks, and more. Currently, about $1 trillion dollars is invested in municipal bonds by individual investors.Continue Reading...
The proposal provides for a continuation of the current income tax laws for one more year, preventing the scheduled expiration of the Bush tax cuts on December 31, 2012. This would be most meaningful for those individuals with income over $200,000 or couples over $250,000, as Democrats are calling for tax rates to automatically increase for these taxpayers.
The Bill also includes a one year continuation of the current $5.12 million estate tax exemption (with inflation adjustments), 35% tax rate and spousal portability of the exemption.
Two House Bills, which have already passed, provide for repeal of the new health care law and the dreaded $3.8 investment surtax that is also scheduled to hit in 2013.
However, with a Democrat controlled Senate, don't look for these Bills to become law anytime soon. Most likely, nothing will happen before the election.
See this article in Accounting Today for more on the Bill.
Tax season is in full swing, and I was recently out of the office for a few days, so I'm a bit late in reporting this, but the provision to do away with the ability of most IRA beneficiary's to stretch distributions over their life expectancies is now back on the table as part of the Senate Highway Bill. See Page 28 for details.
Let's hope it goes away again, for good!
The the provision that would limit stretch IRAs (I blogged about it yesterday) has been removed from the proposed Highway Bill. Good news! See this article on AdvisorOne.com
Senator Baucus' proposal to do away with stretching for most inherited IRA has not gone away as was anticipated earlier this month. A recently introduced Senate bill, S. 1813, the Highway Investment, Job Creation, and Economic Growth Act, includes a provision that would disallow lifetime tax deferred stretching of IRAs for beneficiaries other than a spouse, minor children or the disabled. Other beneficiaries would be required to withdraw and pay taxes on the entire account within five years. The new law would be effective January 1, 2013.
On November 17, 2011, Congressman Jim McDermott (D-WA), a senior member of the House Ways and Means Committee, introduced HR 3467, the “Sensible Estate Tax Act of 2011”. Along with changes to the estate tax, the bill includes many of Obama's 2012 Fiscal Year Proposals with regard to gift and GST taxes. The bill includes the following:
Estate Tax Exclusion Amount of $1,000,000 with Top Rate of 55%:
Reduction of the estate tax exclusion amount to $1 million for decedents dying after December 31, 2011, and indexing for inflation from the year 2000 for decedents dying after 2012. The top tax rate is 55%, and the graduated amounts subject to the rate schedule would also be indexed for inflation.
Provisions designed to coordinate with the gift tax to reflect the decrease in the applicable exclusion amount.
Permanent Spousal Portability of the Estate Tax Exclusion Amount:
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Act") created portability of the estate tax exemption between spouses, but the law expires on December 31, 2012. The Bill makes portability permanent.
Also included is a technical correction in the definition of “deceased spousal unused exclusion amount (“DSUEA”)” of a surviving spouse. The reference to the basic exclusion amount of the last deceased spouse of the surviving spouse would be replaced with a reference to the applicable exclusion amount of the last deceased spouse, so that the statute would reflect the calculation of the DSUEA as described by the Joint Committee on Taxation.
Credit for State Death Taxes Restored:
The credit was phased out from 2002 to 2005. Before, many states had estate tax laws that permitted them to "pick up" the amounts allowable as a federal estate tax credit. Thus states could share in the estate tax collections without increasing the overall estate tax burden. The bill would restore the revenue sharing mechanism with the states.
Valuation Discounts and Minority Interest Discounts Limited:
Valuation discount limitations for certain transfers of nonbusiness assets (defined as an asset which is not used in the active conduct of one or more trades or businesses), including:
- For the transfer of an interest in an entity which is not actively traded, no valuation discount would be allowed with respect to “nonbusiness assets”;
- For the transfer of an interest in an entity which is not actively traded, no discount would be allowed by reason of the fact that the transferee does not have control of the entity if the transferee and the transferee’s family members have control of the entity.
- Effective with regard to transfers after the date of enactment.
Consistency in Value For Transfer and Income Tax Purposes Would be Required :
Imposition of a consistency and a reporting requirement, with penalties for inconsistent basis reporting. The basis of property acquired from a decedent pursuant to Internal Revenue Code ("IRC") Section 1014 must equal the value of that property for estate tax purposes, and the basis of property received by gift must equal the donor's basis determined under IRC Section 1015.
Effective for transfers for which returns are filed after the date of enactment.
Restrictions on Grantor Retained Annuity Trusts :
- Minimum 10 year term;
- Annuity payment cannot be reduced from one year to the next during the first 10 years of the GRAT term; and
- The remainder interest at the time of the transfer must have “a value greater than zero.’’
- The bill contains no guidance regarding the parameters of the "greater than zero" requirement.
- Effective for transfers made after the date of enactment.
Duration of Generation-Skipping Transfer Tax Exemption Limited:
Expiration of the GST exemption 90 years after the establishment of a trust. This is done by increasing to one the inclusion ratio with respect to property transferred after that date.
Applies to trusts created after enactment, and to transfers made from pre-existing trusts if the transfer is made out of principal added to the trust after the date of enactment (subject to grandfathering exceptions).
My view is the that Bill has no chance of passage in its current form, the main sticking point being the drastic reduction of the current estate tax exemption and increase of the rate.
This news courtesy of Financial Advisor Nat Harris (emphasis added):
House Democrats plan to introduce a bill today to extend and overhaul the estate tax beyond 2012 in the opening salvo of what is likely to be a long and politically-charged debate next year.
A favored target of Republicans, the tax on inherited wealth already promises to be one of the most controversial elements of the tax code up for renewal at the end of next year. Six Republican presidential candidates, including all of the front-runners, have said they would repeal the tax.
But the legislation by Rep. Jim McDermott (D., Wash.), a veteran member of the House Ways and Means Committee, proposes to extend the current reach of the estate tax by reducing the amount of the estate exempted from the tax to $1 million from $5 million and raising the tax rate to 55% from 35%, bringing it back to pre-Bush era levels.
"I'm not against people making money in this country, but I do think they have a responsibility to give some of it back," especially at a time of a deep federal budget deficit, McDermott said in an interview this week.
While Democrats acknowledge they will face stiff resistance from Republicans, McDermott said taxpayers need to know Congress is not ignoring the issue until the last minute. In a deal brokered with President Barack Obama last December, Congress reinstated the estate tax for this year and next, after letting it lapse for one year in 2010. While the estate tax is slated to revert back to 2001 levels after next year, Republicans in Congress have already introduced legislation to repeal it again.
"It really is a question of clarity," for both families and planners, McDermott said. "The question is how to bring fairness into it."
Under McDermott's proposal, co-sponsored by Rep. Charles Rangel (D., N.Y.), the exemption for married couples would drop to $2 million from $10 million.
Spouses could still claim the remainder of their partner's exemption if some remains unused after death, as they can now. The rate and $1 million exemption would be adjusted for inflation, beginning at the 2000 level.
The bill, slated to be introduced today, would also unify the estate and gift taxes. That means a taxpayer would only have a single exemption of $1 million for their estate and most gifts. The legislation also includes several provisions from Obama's last budget proposal to end targeted estate tax breaks.
Republicans, often led by Sen. Jon Kyl (R., Ariz.) have pushed hard in previous years to repeal the tax, whose rates and exemption levels have varied wildly over the last decade.
A June 22, 2011article on Trusts and Estates magazine's website contains a nice summary of President Obama's budget proposal measures effecting estate planning. However, with Republican control in Congress and the possibility of a Republican President being elected next year, there is no certainty that any of the changes will actually take effect. Obama already agreed to the temporary increase of the estate tax exemption to $5 million and reduction of the rate to 35% through the end of 2012, and there has been recent discussion in Congress of continuing the law beyond next year.
If the pending appropriations bill in the North Carolina General Assembly passes and is signed into law by Governor Perdue, the filing fee for estates will increase to $120 effective July 1, 2011. This will be the second increase in the last few years, about doubling the cost. Yet another reason to avoid probate!
Filing fees for most other matters will increase substantially as well, and a $20 fee for filing certain types of motions will be added.
Thanks to Keebler and Associates, LLP, CPAs for portions of this summary:
Limit the tax rate that certain individuals will get a benefit for their itemized deductions - For investors filing joint returns and having income over $250,000 itemized deductions would only reduce the investor’s tax liability by a maximum of 28%. For those investors who purchase securities on margin this limitation could be very costly. Short-term capital gains and interest income would be taxed at a rate of 35% yet the interest expense would only receive a 28% benefit. If an investor earned $100,000 of interest income and incurred $100,000 of margin interest expense, while the investor would have broken even on a pre-tax basis, he would be liable for $7,000 in tax.
Require a minimum 10 year term for grantor retained annuity trusts (“GRATs”) – Currently, investors are able to contribute property to a trust and retain an annuity interest in the trust. Any excess may be left to anyone the investor desires. The present value of the annuity is subtracted from the contributed amount, and any excess is treated as a gift to the beneficiaries of the trust. The Treasury publishes a discount rate to be used to determine the present value of the annuity. Many investors retain an annuity whose present value equals the fair market value of the property contributed to the trust. In such case, no gift tax is due, and if the trust can earn a rate of return higher than the discount rate, such excess is passed on to the beneficiaries free of gift or estate tax. However, if the grantor dies during the term of the trust, the assets in the trust are included in the grantor’s estate. In order to mitigate that possibility, many of these trusts are set up as two to three year vehicles. The proposal would be to set a minimum term of 10 years for any GRATs established after the date of enactment of the law.
Require ordinary treatment of income from activities for dealers of equity options and commodities – Under current law dealers of equity options, commodities and commodities derivatives treat their income from their dealer activities in Sec. 1256 contracts as 60% long-term and 40% short-term capital gains/losses. Dealers in other types of securities treat all of their income from dealer activities as ordinary income. The proposal would require such dealers to treat all of their income from such securities as ordinary.
Tax carried interests in certain partnerships as ordinary income – Under current law, the character of income flows from a partnership to its partners. Some partners receive their partnership interests in exchange for services rendered to the partnership. Such interests typically give the partner the right to receive a share of future income from the partnership. At the time the interest is received, the partner would not be entitled to any proceeds if the partnership were liquidated, so there is no taxable income at the time the interest is received. In the future, the partners’ character of the income received from the partnership interest retains the same character that the partnership received. In many cases such income may be either qualified dividends or long term-capital gains, which are taxed at a maximum rate of 15%. The proposal would treat the income on a partnership interest that was not acquired for cash or property as ordinary income, if the partnership is an investment partnership. Gains upon the disposition of such an interest would also be treated as ordinary income. A partnership would be an investment partnership if the majority of its assets are investment type assets, such as securities, real estate, commodities, interests in partnerships, cash or cash equivalents.
Modify rules on valuation discounts – Based on judicial decisions and statutes enacted in many states, valuation discounts are allowed in determining the fair market value of property subject to gift and estate tax even though current tax law states that interests transferred intra-family should not be discounted for “applicable restrictions”. The proposal would grant the Treasury the authority to write regulations that would define a category of “disregarded restrictions” that would be ignored in valuing property for estate and gift tax purposes.
Require accrual of income from the forward sale of stock by a corporation – Under IRC Section 1032 a corporation does not recognize income or loss from purchases and sales in its own stock. This rule applies when a corporation enters into a contract to issue shares in the future for a sum certain. However, if the corporation issued shares currently and received payment for those shares in the future, a portion of the payment would be treated as taxable interest income. The proposal would impute interest income on the transaction in which the shares are issued in the future. While there are real differences between the two transactions in that there are new shareholders at the time the shares are issued, the Administration believes that the two are economically equivalent and should receive the same tax treatment.
Limit Generation-Skipping Transfer Tax Exemption to 90 Years - GST tax exemption (currently up to $5 million) allocated to trusts would last for only 90 years, after which it would expire. This would mean that distributions from the trust after that time would be subject to the 35% GST tax.
Since many states have eliminated or lengthened the rule against perpetuities that limited the time trusts could be in existence, this provision would have a substantial effect on trust creation and administration, severely limiting the use of dynasty trusts.
Make Permanent Portability of Estate Tax Exemption Between Spouses - For 2011 and 2012, a surviving spouse make make use of the predeceased spouse's unused $5 million estate tax exemption. The proposal would make this permanent.
Click here for the Green Book that contains explanations for the proposals.
Last night the House passed HR 4853 by a vote of 277-148 approving the Tax Relief Act of 2010 as passed by the Senate Wednesday. The bill now goes to the President for signature.
The Senate has passed (by vote of 81-19) the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act), and the House is expected to take up the measure tomorrow.
The Act includes bringing back the $100,000 IRA spousal rollover for 2010 and 2011.
The Senate Finance Committee has produced a summary of the Reid Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which extends the Bush tax cuts for two years. Here's what the proposal says regarding estate, gift and generation-skipping transfer taxes:
Temporary estate, gift and generation skipping transfer tax relief. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
Reunification. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.
Note: under the portability heading, the reference to the current $7 million exemption per couple is erroneous, as there is no estate tax this year. The estate tax exemption was $3.5 million per person in 2009.
The House has decided not to vote on the tax cut agreement Obama reached with Republican leaders earlier this week. Particularly objectionable was the proposed $5 million estate tax exemption. From CNN.com:
"According to several Democratic members and aides, much of the discussion focused on the addition of the estate tax provision to the package. The estate tax is scheduled to be reinstated at a higher rate of 55% next year, with the exemption up to $1 million.
A bill that passed in the House a year ago set the threshold for the exemption at $3.5 million and the tax rate at 45%, while the provision in the tax deal exempts estates up to $5 million and sets a lower rate."
The agreement includes a two year extension on the Bush income tax cuts, and with regard to the estate tax (from the Washington Post):
"The deal also would revive the estate tax, but it would exempt inheritances of up to $5 million for individuals and $10 million for couples. Democrats on Capitol Hill are strongly opposed to setting the cap at that high a level and to the 35 percent rate discussed by Obama and Republicans that would apply to the taxable portion of estates."
Stay posted for updates on the future of the death tax. I think the only certainty right now is that there will be no permanent repeal.
Senator Max Baucus, Chair of the Senate Finance Committee on Finance, introduced the "Middle Class Tax Cut Act of 2010" which would make the Bush income tax cuts permanent for those making under $250,000 per year.
The legislative text and summary of the Middle Class Tax Cut Act of 2010, released yesterday by Senate Finance Committee Chairman Max Baucus (D-Mont.), is now available at the Finance Committee’s website at http://finance.senate.gov/legislation/. A summary of some of the estate tax provisions is set out below.Permanent estate, gift and generation skipping transfer tax relief. EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal reinstates the 2009 law for the estate, gift, and generation skipping transfer taxes permanently, setting the exemption at $3.5 million per person and $7 million per couple and a top tax rate of 45 percent. The exemption amount is indexed beginning in 2011. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before the date of introduction. The proposal is effective upon date of introduction for gift and generation skipping transfer taxes.
Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning.
Deferral of estate tax for farmland. The proposal allows taxpayers to defer the payment of estate taxes on farmland of a family farm until the farmland is sold or transferred outside the family or ceases to be used for farming. The proposal also increases the valuation adjustment for donations of a conservation easement.
Increase of special use revaluation amount. The proposal increases the amount of the revaluation to the exemption amount, allowing up to a $3.5 million adjustment.
Minimum 10-year term for grantor retained annuity trusts (GRATs). The proposal requires that GRATs be set up for a minimum 10-year term. The proposal applies to transfers for which returns are filed after the date of enactment.
Basis for estate and income taxes. The proposal clarifies that the basis of property in the hands of the heir is the same as its value for estate and gift tax purposes. The proposal also requires the executor or donor to report the value to the IRS and heir. The proposal applies to transfers for which returns are filed after the date of enactment.
Thanks to Robert Keebler, CPA for this summary.
Congress left Washington with a big pile of unfinished tax issues still on the table. Under tax laws enacted in the past decade, many popular tax provisions expired at the end of last year, or they expire at the end of 2010.
What could happen to all these tax breaks?
- In some cases, Democrats and Republicans have stated they intend to extend them -- but they just haven't gotten around to it or they can't agree on the exact amounts. But there is a good chance that preferential tax treatment will be retained or extended.
- In other cases, there is not bipartisan agreement, so the tax breaks may not be extended.
- With still other tax breaks, it's anybody's guess what is going to happen.
Politicians are not expected back in D.C. until after the November 2 mid-term election. In the meantime, here's a chart with some of the important unresolved tax issues. Consult with your tax adviser for information about how to go forward in your situation.This entry is from today's TrustCounsel eNewsletter by BizActions. Continue Reading...
The Tax Hike Prevention Act of 2010 was introduced in the Senate on September 13 as Senate Bill 3773 "to permanently extend the 2001 and 2003 tax relief provisions and to provide permanent AMT relief and estate tax relief, and for other purposes."
Highlights of the proposed Estate Tax Relief Provisions include:
1. To be effective beginning January 1, 2010 with respect to decedents dying on or after that date; and beginning on January 1, 2011 with respect to gifts made and generation-skipping transfers on and after that date.
2. Reunification of the Gift Tax and Estate Tax Unified Credit Equivalent Amount to $5 million and the amount is indexed for inflation.
3. Top Marginal Rate of Gift, Estate and Generation-Skipping Transfer Tax of 35%.
4. "Portability" of decedent's unused Unified Credit by election of the executor of the decedent's estate to pass the unused portion to the surviving spouse.
5. Special election available for decedents dying in 2010 to apply existing 2010 law rather than the Tax Hike Prevention Act of 2010.
Thanks to attorney David Cahoone of Sarasota, Florida for this update.
Friday's Wall Street Journal had an article on the latest estate tax proposal, from independent Senator Bernie Sanders and Democratic Senators Tom Harkin of Iowa, Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio.
The proposal would retroactively reinstate a $3.5 million exemption with a tax rate of 45%. Estates valued between $10 million and $50 million would pay a 50% rate, estates valued above $50 million would pay 55%, and estates in excess of $500 million would be hit with an additional 10% surtax. The proposal includes a 10-year minimum on grantor retained annuity trusts (GRATs), which would greatly reduce the usefulness of these trusts as estate tax reduction strategies .
Don't look for the proposal to become law anytime soon, however. Many estate tax measures have stalled in this Congress and I don't think things will change in the near future.
On June 15, 2010, the House of Representatives passed The Small Business Jobs Tax Relief Act of 2010 (the "Act") which, if passed by the Senate and signed by the President, will significantly limit the utility of Grantor Retained Annuity Trusts (GRATs).
The Act would impose the following new limitations on GRATs:
(1) A required minimum 10-year term;
(2) The annual annuity payment cannot decrease relative to any prior year during the first 10 years of the term; and
(3) The remainder interest must have a value greater than zero determined as of the time of the transfer.
The new legislation would apply to all transfers to GRATs made after the date of the enactment of the Act.
Impact of New Legislation
When creating a GRAT, a short annuity payment period is considered advantageous because the grantor's death during the annuity payment period will cause all of the GRAT property to be included in the grantor's estate for tax purposes. In addition, potential significant appreciation within the shorter term will not be cancelled out by virtue of a longer term normalization or reduction in values. The required minimum 10-year term increases the mortality risk and could make GRATs less desirable for those who anticipate significant short term appreciation. Furthermore, by mandating that the annual annuity payments cannot decrease during the first 10 years of the GRAT term, the Act removes the possibility of front-loading the annual annuity payments as a means of converting a 10-year GRAT into a shorter term GRAT.
By requiring a remainder interest with a value greater than zero, the Act would require that the grantor pay gift tax, or at least use some portion of the grantor's $1,000,000 gift tax exemption, when establishing the GRAT. Since the GRAT may or may not actually realize an investment return sufficiently in excess of the §7520 Rate (i.e., the hurdle rate to beat to actually have an effective transfer of property via the GRAT) so as to pass property to the GRAT remainder beneficiaries, this can result in a waste of the grantor's gift tax exemption or the payment of gift tax without any benefit.
Please click here for a more detailed explanation of how GRATs work.
What action do you need to take?
Although it is impossible to say whether the Act will actually become law, the current confluence of (i) low asset values, (ii) a §7520 Rate near its all time low, and (iii) the real possibility that GRATs might not remain as viable an estate tax planning technique for much longer, suggests that now is the time to establish a GRAT.
Source: Moses & Singer, LLP June 2010 Client Alert
Senate Finance Committee Chair Max Baucus (D-MT) and House Ways and Means Committee Chair Sander Levin (D-MI) announced that they have reached an agreement on continuing the IRA Charitable Rollover and many other tax saving extensions.
Both the House and Senate previously passed bills to extend these provisions, but since there were different tax offsets in the House and Senate bills, prolonged discussions were necessary to come up with mutually acceptable tax increases.
The House plans to vote on the bill the week of May 24. As for the Senate, Baucus has indicated that he believes that he will get the 60 votes necessary to pass the bill.
Source: GiftLaw eNewsletter (May 24, 2010)
NC General Assembly Considering Bill to Address Issue of Outdated Wills and Trusts of Those Dying in 2010
With no estate tax in 2010, the prospects of reinstatement diminishing daily, and the ever more probable $1 million exemption in 2011, my staff has been working hard to notify our existing clients that they should come to have their wills or trusts updated.
Many older wills and trusts contain formulas or distribution schemes based on the existence of the federal estate tax, and will not work as intended if the testator/grantor dies this year.
The Revenue Law Study Committee of the NC General Assembly has produced a draft bill that will alleviate this problem by providing that the the will or trust provisions would be interpreted as if the 2009 estate tax was still in effect.
However, even if the bill passes, it should not be viewed as a panacea - any person or couple with assets in excess of $1 million should have their estate plan reviewed as soon as possible. I have already had at least one client die with the outdated language still in place.
TheHill.com reported today that, according to Senate Minority Whip Jon Kyl (R-Ariz.), a deal in the works between Senate Democrats and Republicans on the estate tax has fallen apart.
Senator Kyl said: "We no longer have an agreement because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they're not going to allow it on the floor, at least not voluntarily," he said. "So we have to find a way to get a reasonable permanent estate tax reform to the floor where members can vote on it."
Kyl did not share the details of the proposal, but the article states “sources have told The Hill that lawmakers were looking to give taxpayers the option of prepaying their estate tax. The levy would be set at 35 percent for those worth more than $3.5 million. However, the exemption would ultimately increase over time to $5 million and wouldn't be indexed for inflation. Prepayment trusts would pay a lower rate.”
So, one day closer to the return of the $1 million exemption and 55% rate on January 1, 2011.
More from theHill.com on the estate tax in Kyl: Deal on the estate tax in the offing:
"Sources close to the matter told The Hill last week that lawmakers are looking to give taxpayers the option of prepaying their estate tax. The levy would be set at 35 percent for those worth more than $3.5 million, however the exemption would ultimately increase over time to $5 million and would not be indexed for inflation. Prepayment trusts would pay a lower rate.
It is unclear how the gift tax would be addressed. Kyl recently told The Hill that he would like the rate to mirror the estate tax.
The senator said the proposal will be fully compliant with pay-as-you-go rules, which stipulates that anything more expensive than the House-passed estate tax bill must be offset.
The lower chamber recently passed legislation creating a 45 percent tax on estates worth more than $3.5 million. Kyl could need approximately $80 billion in offsets if he goes with the aforementioned plan. "
This is the first I have heard about prepaying the estate tax. Sounds like a desperate money-grab from Congress that will not be attractive to most wealthy folks. Just like with the Roth IRA conversions, prepaying tax is a hard pill to swallow as well as a gamble. I wonder if there will be any refund provisions in case the value of one's estate is significantly less at death.
Lest you start to feel complacent about estate tax reform, I should report that just this morning Professor Jeff Pennell of Emory Law School stated in a presentation in Atlanta that he did not believe that any estate tax fix would pass this year. He feels that nothing in Congress has changed since December 2009 and there are would just not be enough votes for it.
These are interesting times for estate tax nerds like me!
On May 4, Senate Finance Chairman Max Baucus (D-Mont.) stated that members of Congress will discuss the estate tax along with a small business tax bill this week. An aide reported that Committee and floor action on the small business bill might happen before the end of May.
Republicans in particular are trying to increase the estate tax exemption that will be in effect next year from $1 million to at least $3.5 million.
From Baucus sees action on small business bill, estate tax soon on theHill.com:
Baucus said talks on the estate tax and the small business bill are happening simultaneously.
"On substance we are getting very close," Baucus said about progress on the small business bill.
Senate staffers expect the legislation to cost between $10 billion and $15 billion over 10 years. The bill's marquee provision will likely zero out capital gains for one year for small businesses registered as C corporations. A similar measure was in the House-passed small business bill.
Finance could markup its small business bill as early as next week, but that timeline could slip if negotiations on the estate tax falter. Still, a floor vote on the bill before the Memorial Day recess is likely.
Staffers said there would likely have to be an agreement on both the estate and small business bill for both measures to advance. That agreement would likely have to include Senate Majority Leader Harry Reid (D-Nev.) abiding by whatever Finance committee members agreed to.
On the estate tax, Finance members Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) are leading the negotiations, staffers said.
The tax is currently repealed, but barring congressional action it returns next year to pre-2001 levels by socking estates worth more than $1 million with a tax that tops out at 55 percent.
The senators seek to create a less onerous tax. Kyl recently told The Hill the starting point for discussions on the tax was the 2009 law. He also said estates will likely have a choice in complying with the current repeal or the new bill once the legislation is enacted.
The Reconciliation Bill (H.R. 4872), which passed the House and has gone to the Senate contains a 3.8% surtax on investment income for single taxpayers with modified adjusted gross income (MAGI) over $200,000, and married taxpayers with MAGI over $250,000. The tax, which will begin in 2013, is levied on interest, dividends, rents, royalties and capital gains, beginning in 2013, but not retirement benefits.
The Health Care Reconciliation bill includes a new 3.8% Medicare tax on investment income, which includes IRA distributions, interest income (including tax exempt), dividends, capital gains, rental income and oil royalties.
Under H.R. 3590, there is also a 1% increase in the employee Medicare tax on all earnings. Taxpayers with income under $100,000 will benefit from partial exemptions.
Congress has promised the two new taxes are temporary (10 years or so)- but don't hold your breath.
The House Ways and Means Committee has approved H.R. 4849. The "Small Business and Infrastructure Jobs Tax Act of 2010," which contains a provision instituting a 10 year minimum for Grantor Retained Annuity Trusts (GRATs). GRATs are commonly used to transfer wealth to younger generations at no or little gift tax costs. The restriction would be effective upon enactment of the law.
If you are considering a GRAT, now is the time to act!
Click "Continue Reading" for the pertinent text from the report by the staff of the Joint Committee on Taxation.
Here's the latest on the fight over the future of the estate tax tax, from Bloomberg.com. In general, Republicans and business lobbyists are pushing for a $5 million exemption and a 35% rate, while the Obama administration is counting on a $3.5 million exemption and a 45% rate. If nothing is done, 2011 will bring a $1 million exemption and a 55% rate.
Nothing has been decided yet, but here's the scoop from TheHill.com as of February 9, 2010. At a minimum, the 2009 $3.5 million exemption and 45% rate would continue, effective January 1, 2010.
Here's a recent article on the estate tax from the WSJ.com. Not exactly objective reporting, more like an opinion piece against the "death" tax.
The articles states that "the best strategic outcome now is to let the death tax expire in January as scheduled under current law, and return to this debate next year when the tax rate is zero. Then let liberal Democrats explain to voters on the eve of elections that they must restore one of the most despised of all taxes."
This is not exactly accurate in that while "restoration" of the estate tax for 2010 would require congressional action, without any action the exemption will be reduced to $1 million and the rate will increase to 55% in 2011. So if next year the Democrats propose imposing the current $3.5 million exemption and 45% rate on 2010 and future years, they will actually be proposing significant tax relief. That would get my vote.
Here are yesterday's and today's articles from the Wall Street Journal. While there is a brief discussion of the 2010 "Carryover" Basis rule that will apply instead of the estate tax, there is no mention of the fact that each estate will have $1.3 million in basis to apply to assets, with an extra $3 million for spouses. Even with these generous exemptions, it will be a record-keeping nightmare.
Other than perhaps a one year extension of current law, we are unlikely to see any movement on the estate tax in 2009. CCH Tax Newsletter.
The U.S. House of Representatives is scheduled to vote on the estate tax today, but even if legislation passes, Senate approval is necessary. Lots of politics involved for a tax that affects so few people. See what the Washington Post has to say.
This legislation would continue the current $3.5 million exemption and 45% rate, but does not include the spousal "portability." While the bill may very well pass in the House, Senate action is uncertain. More...
On November 17, 2009, Senators Tom Carper (D-DE) and George V. Voinovich (R-OH) reintroduced bipartisan legislation that would freeze the estate tax at its current 2009 level (a $3.5 million exemption and 45% rate) and allow a surviving spouse to elect to use the exemption of the his or her predeceased spouse. The bill was referred to the Senate Finance Committee.
And don't even think about estate tax repeal. From Brian Dooley CPA, MBT's newsletter:
Update: The AMT patch is gone as seventy-three tax breaks will get a twelve month life.
House Ways and Means Committee Chairman Charles Rangel, D-N.Y. is introducing legislation next week that would keep a variety of tax breaks from expiring before the end of the year. However, without the AMT patch, there is a ten percent tax increase for those living in California and New York and a five percent in other states (the math of the AMT depends upon your state tax rate).
Instead of sending the bill through his committee, Rangel plans to dispatch the bill directly to the floor of the House, so there is no debate There are about 73 tax provisions scheduled to expire by Dec. 31, including the credit for research and experimentation expenses, deductions for tuition and state and local taxes, film and TV production expensing rules, a deduction for contributions of food inventory, tax breaks for certain expenses by school teachers, and a host of other goodies. Why only a twelve month extension? It makes the lobbyists pay up each year.
The Estate Tax is not going away. One more year at $3.5 million exemption. In 2011, the exemption plunge to $1million. Let's face it, we need the money. As they say, dead men don't vote.
Another article from CQ Politics about the Democrats' plan for the estate tax in 2010.
Coming as no surprise to me, anyway, an article on the website CQ Polictics, House LIkely to Delay Estate Tax Consideration, states that the House will likely postpone any movement on estate tax legislation until after Thanksgiving. I'm still of the opinion that a one year "patch" continuing the current $3.5 million exemption and 45% rate is the most likely outcome.
On October 15, 2009, Rep. Schrader (D. Oregon) introduced "The Small Business and Family Farm Estate Tax Relief Act of 2009" ( H.R. 3841), which would "repeal carryover basis for decedents dying in 2009, and "increase the estate tax exemption to $5,000,000" and "reduce the maximum estate and gift tax rate to 45 percent" for decedents dying after December 31, 2009.
Trouble is, carryover basis is to apply to decedents dying in 2010, not 2009. Seems this bill needs to be amended to correct the description of what it would do.
House Bill 1058 - Effective December 1, 2009, an individual resident of North Carolina who is a debtor can retain, free from the enforcement of the claims of creditors, the debtor's aggregate interest, not to exceed $35,000 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor. The current amount is $18,500.
· An unmarried debtor who is 65 years of age or older can retain an aggregate interest in the property not to exceed $60,000 in value so long as the property was previously owned by the debtor as a tenant by the entireties or as a joint tenant with rights of survivorship and the former co-owner of the property is deceased. The current amount is $37,500.
North Carolina Governor Beverly Perdue signed the Budget bill (SB 202) into law. The bill includes increased income and sales tax rates. See this post from Enrolled Agent Brian Strahle.
Democrats in the North Carolina House and Senate reached a compromise on tax increases yesterday. Briefly, the proposal would:
- Increase income taxes by 2%
- Increase sales tax by 1% (to 7.75% in most counties)
- Increase cigarette taxes by 10 cents per pack
- Increase beer, wine and liquor taxes
The income and sales tax increases are supposedly temporary, for a two year period. There are no additional sales taxes for certain services as contained in the earlier Senate proposal.
The only good thing I can say about this proposal is that at least the increased income taxes can be deducted for federal tax purposes (for those that itemize deductions). Additional sales taxes would not necessarily be deductible for those who deduct income taxes rather than sales taxes.
The U.S. Senate Finance Committee is considering instituting a 1.45% Medicare tax on investment income, including interest, dividends, capital gain, and partnerships and rentals. Currently long term capital gains and qualified dividends are taxed at a maximum of 15%, while the other types of income are taxed at ordinary income rates.
See this story on Bloomberg.com for details this proposal for paying for health care reform.
I personally would not object too much to this tax if it only applied to investment income over a certain amount, say $25,000 annually. With unavoidable multiple state and federal income tax increases on the horizon, I think we'll see an increased interest in retirement savings, life insurance and annuities as a way to defer taxes.
Senate Bill 202, among other things, contains many tax increases for us in the Tar Heel state, to wit:
- Increase top income tax brackets to 8.25% and 8.5% (currently 7.75%)
- Raise the State sales tax from 6.75% to 7%
- Apply sales tax to repairs, warranties, installation, movies, athletic events, amusement events/activities, courier and delivery services, and internet sales.
- Require Limited Liability Companies to pay a franchise tax.
- Increase the liquor tax by 1.5%.
You may wish to contact the following Legislators to let them know how you feel about this proposed law:
Representative Paul Luebke (Chair of the House Finance Committee)
Senator David Hoyle (Chair of the Senate Finance Committee)
If you don't support the bill, there's a petition to sign. Make some noise, people!
On April 22, 2009 Representative Jim McDermott of Washington has introduced H.R. 2023, which has been submitted to the Ways and Means Committee for study. The Sensible Estate Tax Act of 2009 would (1) allow an estate tax exclusion of $2 million adjusted for inflation in calendar years after 2010; (2) revise the estate tax rates for larger estates (45% up to $5 million, 50% from $5-10 million, and 55% above $10 million; inflation adjusted); (3) restore the estate tax credit for state estate, inheritance, legacy, or succession taxes; (4) restore the unified credit against the gift tax; and (5) allow a surviving spouse an increase in the unified estate tax credit by the amount of any unused credit of a deceased spouse.
I agree that this legislation is sensible from a fiscal standpoint, enabling the IRS to collect more revenue (than a $3.5 million or higher exemption would allow), while providing a healthy $4 million that married couples can pass on to children or others with no special planning. It will also help many states such as Florida that only can collect estate tax on a state level to the extent that the federal government provides a credit, rather than a deduction.
As for spousal portability, as I have said before, while on its face it appears to obviate the need for credit-shelter or bypass trusts, that's not necessarily the case. Even with portable exemptions, credit-shelter trusts will be important from an asset preservation standpoint, avoiding the possibility of taxation should the surviving spouse's estate exceed $4 million, and protection against future reductions in the estate tax exemption.
There's also the question of how the exemption amount available to the surviving spouse would be established. If a couple thinks there's a chance that the survivor's estate will exceed $4 million, would an estate return need to be filed at the first death, even it it's under $2 million? How else would any transfers to others than the spouse be documented?
As reported in the Giftlaw eNewsletter, the potential tax increases to pay for healthcare reform may include the following:1. Employer Health Care Exclusion
-- The exclusion could be capped or phased-out for higher-income employees. For higher-income persons, part of their medical premium will be taxable, even though paid by the employer.
2. Income Tax Deduction -- The 7.5% floor for medical expenses could be raised to a substantially higher level and reduce the value of the deduction.
3. HSAs and FSAs -- The health savings account (HSA) or flexible spending arrangement (FSA) could have reduced contribution limits. FSA fund distributions could be limited to qualified itemized medical deductions.
4. Medicare -- All state and local employees may be required to participate.
5. Alcohol Tax - An increased and uniform national tax may apply to alcohol.
6. Soft Drink Tax -- A new tax may be levied on sugar-enhanced beverages.
7. Top Brackets Increase -- The current top 35% and 33% brackets may rise to 39.6 % and 36%.
8. Itemized Deduction Limits -- Higher income individuals may have a 3% floor on deductions and would also lose their personal exemptions.
9. Capital Gains Tax Increase -- The 15% capital gains tax rate may be increased to 20%.
10. Estate Tax -- Retained with $3.5 million exemption and 45% rate.
11. Estate Tax Discounts -- Valuation discounts reduced or eliminated.
12. Grantor Retained Annuity Trusts -- GRATs limited to ten years or longer.
President Obama's Green Book contains proposals for modifying the GRAT rules, eliminating valuation discounts for transfers of interest in many family limited partnerships and limited liability companies, and increasing income tax rates and limiting deductions for high income taxpayers.
Here's a nice outline prepared by Bob Keebler, CPA of Virchow Krause & Company, LLP in Wisconsin.Continue Reading...
The North Carolina Senate Finance Committee is reviewing a plan to cut income and sales taxes while instituting new sales taxes on certain services.
For income taxes, the top rate would drop from 7.75% to 7.5%, while the lowest rate would decrease from 6% to 5.25%. The calculation of income taxes would also be made easier, using the federal adjusted gross income without having to make further changes to determine the NC taxable income. Credits would be allowed for charitable contributions and home mortgages, and the child tax credit would increase $25 to $125.
Corporate income tax rates, currently 6.9%, would be reduced over a two year period to 4.5%, but limited liability companies would be required to pay franchise taxes. The could be bad news for for LLC owners, would are currently required to $200 annually to the state for the privilege of operating the company.
And, to the benefit of professionals and other business owners, state and local privilege licenses would be eliminated.
Finally, the state sales tax would be lowered from 6.75% to 6.00%. Many counties, however, have local rates than are higher. Sales taxes would be instituted on heretofore untaxed services/items such as building repairs, extended warranties, and downloaded music and software.
Baucus has already crafted a revised bill, the Energy Independence and Tax Relief Act of 2008, which should be submitted to the Senate next week. Democrats oppose any tax extenders without tax offsets.
See my earlier postings under the heading Pending Legislation for a more detailed description of the tax extenders, which include the IRA charitable rollover.
On May 21, the U.S. House passed the Renewable Energy and Jobs Creation Act of 2008 (H.R. 6049). The act includes a one year extension of the Charitable IRA rollover and similar tax provisions and updated tax incentives for renewable energy. The state and local sales tax deduction, and tuition deduction extensions are also included.
The Senate and the White House support the continuation of the charitable rollover, but Bush will most likely veto the act in its current form since it includes $54 billion in tax increases and no extension of AMT relief.
The House Ways and Means Committee passed H.R. 6049, the Energy and Tax Extenders Act of 2008, on May 15, 2008. The bill includes a one-year extension of the $100,000 IRA Rollover for taxpayers age 70 and over, as well as many other tax extenders and renewable energy provisions.
Included in the bill are one-year extensions on the deduction for state and local sales tax, a deduction for educational expenses, the teacher's expense deduction, a provision allowing non-itemizers to deduct a portion of property taxes, and an expanded child tax credit for low-income taxpayers.
Charitable-related extensions include the enhanced deductions for gifts of apparently wholesome food, gifts of books to schools, gifts of computers for educational purposes and favorable Subchapter S basis rules for gifts of appreciated property.
Charles Rangel (D-NY), Chairman of the Committee, commented that "This bill would provide critical tax relief to help working families cope with the rising cost of living. Furthermore, this bill would extend vital tax incentives for American businesses to help them invest in new technologies and remain competitive internationally." He also stated that the bill's energy provisions will "reduce our dependency on foreign oil."
Let's hope that's true! Look for passage of the bill by the House and Senate sometime next month.
This post is excerpted from an article in the May 19, 2008 Giftlaw eNewsletter.