Hopefully we are entering a new chapter in American history. This chapter will undoubtedly be marked by change. The tax system will be changed. Tax changes will require a high wire balancing act: raise funds from those that can reasonably afford to pay them to address the deficit and perhaps expanding government programs, while simultaneously not choking off economic incentives and exacerbating current economic problems. It's still premature to really call those changes. Even though proposals have been put forth much detail, and the inevitable political horse-trading remain. Here are some thoughts (and wild guesses) on some of the changes, what they might mean to your planning, and steps you might consider taking.
◙ General Thoughts on Obama Tax Legislation.
GW's tax bennies expire at the end of 2010 so President Obama will have to address tax legislation before then. Most administrations are reluctant to enact tax increases. Letting some of the bennies expire, or perhaps making them permanent in a less generous form, might be a politically palatable way to raise revenues. The alternative minimum tax (AMT) remains problematic and will have to be addressed. The need to periodically enact patches to prevent the AMT from applying to a broad swath of taxpayers desperately needs to be addressed. The AMT could be modified so that it only serves the purposes it intended, or something more substantial might be undertaken (although with the tough agenda facing the Obama administration simpler fixes may be preferred).
◙ Tax Rates.
Progressive is in! Expect higher personal income and capital gains taxes for higher earning tax rates. Before getting too bent out of shape, remember that progressive tax rates for wealthier/higher income taxpayers have been part of our tax system for lots of years. The new relationship between the highest marginal ordinary income tax rates and capital gains rates might also be a factor affecting future planning (e.g., the bigger the spread the more worthwhile the alchemistic techniques of transforming ordinary income into capital gains). Expect lots of small dollar tax benefits with low threshold phase-outs to help moderate and lower income taxpayers.
◙ Obama Estate Tax.
The word is a $3.5 million exclusion and 45% rate. However, taxing income above $250,000 puts a much higher percentage of income earners in the maximum bracket then $3.5 million does to the estate tax. If Obama tax legislation made the same percentage of taxpayers subject to the estate tax as would be subject to the income tax, the $3.5 million exemption could be lowered. Portability might be in! If you die, your surviving spouse, if he/she doesn't remarry could take advantage of your unused exemption. That effectively would give married couples $7 million of exemption before an estate tax kicked in. Portability makes ignoring planning seductive in that you can avoid tax on up to a $7 million family net worth without the need to re-title assets and include a bypass trust in your will, complications required under the current estate tax. Caution: Bypass trust planning to protect assets from new spouses, claimants, appreciation above the exclusion and more will remain important. Don't be lulled into inaction if portability is enacted. (Bypass trust and related planning will also remain important for your estate planner reaching his retirement goals, but we'll assume that doesn't motivate you to plan more).
◙ Will you have to Kiss Favorite Estate Tax Acronyms Goodbye? OK, so we all argue with the IRS that those 65% discounts on family limited partnerships (FLPs) with marketable securities are eminently reasonable (with a straight face no less). The reality is the income tax laws have included restrictions on related party transactions for a long time. Legislating away discounts on family transactions might eliminate one of the most significant estate tax reduction mechanisms the wealthy have used to minimize gift, estate and GST tax. While their at it, the Obama tax writers might just deep six grantor retained annuity trusts (GRATs) as another wealthy taxpayer technique that has some inherent unfairness to it (heads the taxpayer wins, tails the taxpayer doesn't loose). What about those annual demand powers in trusts that rich folk have used to shift large chunks of value out purportedly for the benefit of every descendant, niece, nephew, and third cousin on Uncle Joe's side? Some folks have just abused the technique. Perhaps they'll bite the tax planning dust too. Tip: The early tax plan catches the tax benefit worms. Move now!
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