Monday, October 4, 2010

Get Busy Congress!

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

What is the Estate Tax this year? What will the Estate Tax be next year? What will happen to income tax and capital gains tax rates next year? Nobody really knows. Get busy Congress; there is enough uncertainty to deal with.

Estate Tax: We currently have no estate tax. In 2009 a twenty million dollar estate might have resulted in an eight million dollar estate tax. In 2010 a twenty million dollar estate will owe nothing in estate taxes. However, also in 2010, the cost basis step-up at death is limited to 1.3 million (4.3 million for a spouse). Step-up refers to the forgiveness of capital gains on inherited assets. Therefore, in the previous example, there would be no estate tax due but the estate could owe substantial capital gains taxes. What does all of this mean? Less federal tax revenue overall and a record keeping nightmare for large estates. Some heirs will have to uncover seventy years of investment activity to calculate mom and dad’s capital gain…

Income Taxes: 2010 income tax rates are known. In 2011, however, the 2001 Bush tax cuts expire and rates return to previous levels (higher), unless Congress does something first. Most expect Congress to allow top tax rates to revert to previous levels (rise) but keep lower and middle income brackets as is. Nobody really knows. Anything is possible.

Capital Gains Taxes: Imbedded within the 2001 Bush tax cuts was a reduction in capital gains tax rates from 20 to 15% for high income taxpayers (10 to 0% for low income taxpayers). These rates also expire in 2011. They will revert to previous levels (20% and 10%) unless Congress does something first. The special tax rate for dividends will also expire. Will Congress let these rates expire? Probably. But nobody really knows.

Financial planning is full of uncertainty. There is just more than usual this year. High deficits may tempt Congress to shoot for revenue. Congress still could enact a retroactive 2010 Estate Tax. The 2010 death of billionaire New York Yankees owner George Steinbrenner may be reason enough… An ailing economy may tempt Congress to extend current tax rates. The November elections may lead to inaction. Inaction appears more likely after Congress failed to address the estate tax in 2010... There is a lot at stake. We will have to wait and see.

In the meantime, read your Health Care Directives and be nice to your kids. There is a little incentive to “pull the plug” this year!

Be safe.

The above explanations are summarized. Please confirm all specifics with your tax professional.

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