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The Health Care Reconciliation bill sent to the Senate today includes a new 4% medicare tax on investment income, which includes IRA distributions, interest income (including tax exempt), dividends, capital gains, rental income and oil royalties.  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.

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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.

 

Continue Reading...

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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.

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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.

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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.

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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.

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Continue Reading...

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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.

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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...

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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.

Senate Bill 2784

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 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.

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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.

 

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Another article from CQ Politics about the Democrats' plan for the estate tax in 2010.

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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.

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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.

 

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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.

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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. 

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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.

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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.

 

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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)
(919) 733-7663

Senator David Hoyle (Chair of the Senate Finance Committee)
(919) 733-5734

If you don't support the bill, there's a petition to sign.  Make some noise, people!

 

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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?

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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.

 

 

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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...

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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.

 

 

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The Renewable Energy and Job Creation Act of 2008, the latest version of legislation featuring several tax extenders, alternative minimum tax relief and energy provisions failed to pass the Senate.  Championed by Senate Finance Committee Chair Max Baucus, the bill faced stiff opposition from Republicans who objected to the tax offsets, most notably taxing offshore deferred compensation of hedge fund managers and delaying a business tax interest deduction until 2019.

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.

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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.

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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.

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