What the new tax law means for you in 2011
After a mere 10 years, the long-undecided issues regarding the Federal Estate and Gift Tax have been decided so far. At least we know where it is going for the next two years.
As I reported last week, a December compromise between President Obama and Republican leadership moved through Congress with uncommon speed to be passed last Thursday night. This was, it should be noted, not without some weeping and gnashing of teeth since several Democrats expressed deep concern at tax breaks for some of the wealthiest Americans.
How the tax cuts could be made up with spending cuts or maybe by overall tax reform is not yet on the horizon and, to the millions of Americans caught up in holiday shopping and end-of-the-year projections, the mere fact that there is some resolution probably brings relief. Without the compromise, virtually every taxpaying American would have paid more whether because of higher personal income tax rates or return of provisions from before the 2001 Economic Growth and Tax Relief Reconciliation Act.
Here are some of the considerations as to what the tax package just passed means to you for 2011:
Estate planning. Unfortunately many Americans will further delay estate planning for themselves and their families because they believe they are safely within the $5 million unified credit for individuals ($10 million for married couples). This is because many believe that tax planning is the only reason for estate planning.
This is not true.
Estate planning is to assure that the person or people who you want to inherit actually inherit and in the proportions you designate. It also allows you to decide when and under what conditions heirs inherit. Estate planning is an extremely powerful tool for those who are concerned that their children, on inheriting, will dissipate the funds too soon, or that their spouse, on their death, might remarry and leave everything to the second spouse and her or his family. Trusts in wills can address these concerns.
Another critical point is that, for those who have no estate plan, the government will write their will for them under what are known as the intestacy laws. As one example, where a married person without children but having living parents leaves no will but owns assets titled in his or her name alone, Pennsylvania law would “write” that person’s will under the intestacy laws so that his spouse would receive a specific dollar amount and the balance of the estate would be shared between his spouse and parents.
Young parents need wills to indicate who they would chose as guardian for their children in the event that both of them die. Grandparents of minor grandchildren need to designate who should manage funds left to their young grandchildren especially if their child should die first. Grandparents could designate a trustee who could be a family member, daughter-in-law or son-in-law, the executor of the estate, or a bank or institutional trustee.
Even without a will, beneficiaries of IRAs, retirement funds and life insurance need to be named along with backup beneficiaries if the original beneficiary dies first. This does not apply just to the wealthy. If an IRA or retirement fund is left to an estate instead of individuals, an additional hefty tax known as IRD or income in respect of decedent, can apply even after this tax compromise.
Payroll taxes and unemployment benefits. Working Americans will see their payroll taxes reduced for one year in 2011 and continuation of the lower rates instituted during the Bush administration. It is hoped that the available funds will stimulate the economy with new purchases. Paying off debt from home mortgages, establishing contingency savings funds, and investment are also considerations.
For the unemployed, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 also extends unemployment benefits again.
Business incentives. One of the major incentives of the new act for businesses is to allow expensing of purchases that would ordinarily be depreciated over time. Immediate tax write-offs are expected to incentivize major capital purchases. Whether this and other credits will pull back the economy to the point needed to build employment and further restore confidence is yet to be seen.
On a personal note, if shoppers considered the new law already, this may have been reflected over the weekend. The malls were definitely crowded once again.
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.