How the Obama-GOP tax proposal might affect you
Readers following the discussion on the Federal Estate and Gift Tax along with other provisions generally referred to as the Bush-era tax cuts will have noticed a major shift in the dialogue recently as it appears that President Obama and Republican leaders have arrived at a compromise.
Parties who remain to be convinced are, generally speaking, on the Democratic side of the aisle. If action is taken it will have to be done quickly before Jan. 1. In fact, as I write, the U.S. Senate is taking up the matter.
Just as a quick summary, as to the estate tax, if action is not taken before Jan. 1, then the amount that can be inherited without being subject to estate tax would revert to $1 million and the beginning rate would be 55 percent for everything above $1 million. This means that many Americans with combined assets including their homes, retirement funds and life insurance over $1 million could die with their heirs paying taxes on the excess over $1 million at 55 percent.
The result would especially be true if they failed to plan using any of the available estate tax planning methods.
This extreme potential change was built into the original law passed during the Bush era in 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The idea then was that, given 10 years to arrive at a solution regarding Federal Estate and Gift Tax, someone would figure out a compromise before Jan. 1, 2010, when the estate tax would go out of existence for a year or at least certainly before Jan. 1, 2011, when the tax would return at the pre-2001 rates.
Americans dying in the current year leave behind estates totally without federal estate tax regardless of size. Next year it would be different.
The lesson, of course, to be learned from this is never to underestimate the power of institutional procrastination.
The Obama and Republican patch would tax the excess of estates over $5 million ($10 million if married) at a top rate of 35 percent. The compromise is embodied in a Senate bill introduced by Senate Majority Leader Harry Reid (D-Nev.). Very few families would be subject to the tax and relatively little would be paid.
While this and other provisions of the law overwhelmingly favor wealthier Americans, the bill titled the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, also includes extension of the Bush-era tax cuts for everyone, a one-year payroll tax cut for working Americans, hiring incentives for businesses, and extension of benefits for the long-term unemployed. At least one columnist in New York has referred to the bill as “When Uncle Sam plays Santa” — Peter Siris, New York Daily News, Dec. 13, 2010.
It is difficult to believe that, only a month ago, an extremely heated campaign hinged largely on the idea that the federal deficit needed to be substantially reduced or we would be facing Armageddon. Apparently memories are short.
Not to be ignored is also the viewpoint that reduced income from taxes is not a problem and only government spending counts. I find that difficult to accept in personal budgeting and would find it similarly difficult to believe on a national level.
In any event, whether an individual favors the bill or rejects it may depend greatly on perspective.
As one example, a person laid off from his job and hoping to continue to collect unemployment compensation would benefit from the bill and this would be a compromise by Republicans who would otherwise oppose it.
The original idea of the Obama administration from the perspective of income tax relief was that it was to be provided to Americans whose adjusted gross income subject to federal tax was $200,000 or less ($250,000 or less for married couples). When this was unable to pass Congress, an alternative was proposed that relief would remain for those with incomes of less than $1 million per year. This was also rejected.
One factor does seem clear and that is that, if there is no resolution before Jan. 1 regarding estate taxes, payroll taxes, income taxes, tax credits and unemployment compensation, the uncertainty that this would generate could not be helpful to the economy.
With consistency, average Americans and businesses can plan and consistency, for now, may be the best that we can get.
Listen to “50+ Planning Ahead” with Janet Colliton and Phil McFadden from 4 to 4:45 p.m. Wednesday on WCHE 1520 AM.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.