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Taxation Brief | Analysis & Commentary on Current Taxation Issues

Estate Tax & The American Taxpayer Relief Act of 2012

Cook & Cook:

The federal estate tax, which was scheduled to apply to estates in excess of $1 million at a rate of 55% beginning in 2013, will be permanently modified so as to apply to estates in excess of $5,000,000 — indexed for inflation — at a rate of 40%. The $5,000,000 exemption continues the tax policy created under the Tax Relief Act, however, the 40% rate is an increase from the 35% rate under the Tax Relief Act.


Fiscal Cliff Averted?

The U.S. House of Representatives voted, 257 to 167, to approve the U.S. Senate bill to avert the so-called “fiscal cliff” by, inter alia, permanently extending the Bush-era tax cuts for all but the highest tax bracket.

The bill now awaits the signature of President Obama.

Senate Passes Bipartisan Fiscal Cliff Deal


Under the Senate package:

– Taxes would stay the same for most Americans. But they will increase for individuals making more than $400,000 and couples making more than $450,000. For them, it will go from the current 35% to the Clinton-era rate of 39.6%.

– Itemized deductions would be capped for those making $250,000 and for married couples making $300,000.

– Taxes on inherited estates will go up to 40% from 35%.

– Unemployment insurance would be extended for a year for 2 million people.

– The alternative minimum tax — a perennial issue — would be permanently adjusted for inflation.

– Child care, tuition and research and development tax credits would be renewed.

– The “Doc Fix” — reimbursements for doctors who take Medicare patients — will continue, but it won’t be paid for out of the Obama administration’s signature health care law.

– A spike in milk prices will be avoided. Agriculture Secretary Tom Vilsack said milk prices would have doubled to $7 a gallon because a separate agriculture bill had expired.

Now it’s up to the House.

Movement On The Fiscal Cliff?


Sources told CNN over the weekend that Boehner’s latest proposal dropped Republican opposition to two key demands by Obama — higher tax rates on the wealthiest Americans and an automatic extension of the federal debt limit.

Definitely a retreat on statements by the Republicans about not increasing rates.

Senator Hatch Warns of Estate Tax Increase


Most of the focus of the fiscal cliff debate has been on the expiration of the income tax cuts set to go into effect on Jan. 1, but Sen. Hatch warns that Congress should be giving more attention to the pending estate tax increase as well. Hatch says the estate tax is poised to jump to a 55 percent tax rate, while the exemption level falls to $1 million per person, and the impact would hit small businesses and family farms especially hard. Under current policy, estates are taxed at a 35 percent tax rate with a $5.12 million exemption.

IRS Issues Guidance on 3.8% Investment Income Tax Under Healthcare Law


To illustrate when the tax applies, the IRS offered an example of a taxpayer filing as a single individual who makes $180,000 in wage income plus $90,000 from investment income. The individual’s modified adjusted gross income is $270,000.

The 3.8 percent tax applies to the $70,000, and the individual would pay $2,660 in surtaxes, the IRS said.

Draft regulations can be found here and here. An FAQ can be found here.

A Fiscal Cliff Infographic

Click on the graphic to see a larger version on Cook & Cook’s main website.

The Fiscal Cliff: What Should We Do?

Mortgage Interest Deduction Under Scrutiny

New York Times:

There are broader approaches, too. In its proposed budget, the Obama administration plans to focus on top earners. The administration suggests capping deductions at 28 percent for high-income households, those earning more than $250,000.

Under the current rules, a high-earning household deducting $20,000 in interest payments would probably apply a 35 percent rate to that amount and receive $7,000 in tax savings. The Obama budget aims to limit that tax saving by capping that rate at 28 percent. If that rate were applied to $20,000 of interest payments, the saving would fall to $5,800.

The United States would capture the difference. Over the next 10 years, that 28 percent cap could increase tax revenue by $584 billion, according to the Treasury Department.

While many economists have openly opposed the mortgage interest deduction for some time, few politicians have been willing to do so for fears of their constituents. However, recent statements from both sides of the aisle indicate that even this deduction may be on the table in the “fiscal cliff” negotiations.

Extending the Payroll Tax Cut from Both Sides of the Aisle


Democratic Senator Kent Conrad told Reuters that extending the payroll tax cut would have “the biggest bang for the buck on economic growth.”

“We need to do something on stimulus as part of the overall fiscal cliff. We have to do something because the economy’s not growing fast enough,” said Charles Schumer, one of the Democratic leaders in the Senate.

Max Baucus, chairman of the Senate Finance Committee, told reporters that the payroll tax cut extension needs to be “on the table,” in any discussions over resolving the fiscal cliff.

Republican Senator Rob Portman agreed that the tax cut had to be part of fiscal talks, and Democratic Representative Chris Van Hollen has long said the tax break would help the economy.

The Obama administration has been adamant about not extending the tax break for the third year in a row.

This potential willingness to, or maybe posturing about, extending the tax cut is a departure from previous bipartisan statements to the contrary.

Running Some Numbers on the Expiring Gift Tax

New York Times:

For the truly wealthy, the tax benefits can be considerable. Consider what Ms. Kroch calculated for someone with $15 million. She assumed that the person gave $5 million to a dynasty trust — meaning a trust that lasts for at least 100 years — and kept the other $10 million in his own name. Ms. Kroch then assumed a 6 percent rate of return over 25 years and an estate tax of 55 percent with a $1 million exemption — what it will be next year unless Congress acts.

The $5 million in the trust would grow to $21.45 million, while the $10 million would become $42.9 million — $26 million of which would go to estate taxes. If the person kept the entire $15 million, it would grow to $64.37 million over the same period, but the estate tax would be $35 million. Put simply, using the gift tax exemption this year would save that person’s estate $9 million in taxes.

For the risk-averse wealthy, the numbers are fairly convincing.