28% Solution Affects Charitable Income Tax and Estate Planning
Money Matters Radio – Estate Planning Q&A with Gary Goldberg
By: Martin M. Shenkman, Esq.
Introduction/Overview Tax Proposals: Washington Tax Gymnastics Affect Current Planning. A host of tax proposals are floating in Washington. The Americans Jobs Act was sent to Congress in early September and was the subject of the national television address, President Obama’s Deficit Reduction Plan was sent to the joint budget committee (the “Super Committee”).
The Americans Jobs Act
This includes a number of tax incentive proposals. It is called a “jobs bill” and not a “stimulus” bill, but many of the provisions do look like stimulus provisions we’ve seen in prior years.
Bonus Depreciation: Business proposals include extending 100% bonus depreciation for one more year, so it will apply to property placed in service in 2012.
Social Security Taxes:We presently have a two point reduction for employees. The proposal would increase this to 3.1%, or half of the Social Security amount. On the employer side, it would apply the 3.1% cut to the first $5 million of any employer’s wages. To the extent that, wages subject to Social Security taxes are increased the first $50 million of increase would be excused from Social Security tax.
Employment Taxes: The proposals are for a series of expansions of the work opportunities tax credit for the long term unemployed. This is essentially a $4,000 credit for hiring someone unemployed for at least six months.
Additional Incentives: $200 billion of other “incentives” (not “stimulus”) have been proposed to provide for continued employment of teachers and first-responders and to promote infrastructure rebuilding.
These incentives total $447 Billion. But, because the American Jobs needs to be revenue neutral, as to the deficit, it includes offsets primarily tax increases, many of which are opposed by the Republicans:
“28% Solution”: The benefits of itemized deductions, above the line deductions, and certain exclusions, will all be limited to 28%, regardless of the taxpayer’s actual tax bracket, starting in 2013. The proposal goes well beyond just itemized deductions and includes “personal deduction” items, such as health insurance costs of the self employed, moving expenses, contributions to health savings accounts (HSAs), interest on education loans, etc. The Republicans have not responded favorably to this proposal. But, it is on the table, so planners need to keep it in mind. “Many tax practitioners feel that this change is unlikely to occur this year or even in 2012,” notes Schwarz.
Carried Interests: The basics are similar to earlier carried interests proposals. The concept is to have income attributable to a carried interest in a financial organization that has been granted primarily for financial services and tax it as ordinary earned income and not capital gains. It will also mandate that this income be subjected to employment taxes. This proposal also includes some provisions endeavoring to tighten “loopholes” (tax incentives) that some have explored to circumvent these types of proposals.
Oil and Gas Industry: The proposals would eliminate most oil and gas preferences.
These changes could have significant income tax planning impact on many high income clients. The “28% solution” (tax increase) could change the calculus on charitable contributions and a range of discretionary deductions. It will also mean that, if higher marginal income tax rates are applied to high earning taxpayers, one of the common approaches of using deductions to offset the higher taxes may not be viable.
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