Friday, January 28, 2011

Tax Uncertainty Resolved... For Now...

Pathways Advisory Group, Inc.
Dustin Smith, CFP®













What is the Estate Tax? What will happen to Income and Capital Gains Tax rates? These questions were finally answered by The Tax Relief/Job Creation Act of 2010. Unfortunately, the uncertainty will return as the Act expires in two years.

Estate Tax: The Tax Relief/Job Creation Act of 2010 set the maximum estate tax rate at 35% with an exclusion of 5 million dollars. The Act also reinstates the cost basis “step-up” at death. The step-up (discussed in an October blog) refers to the forgiveness of capital gains on inherited assets. These provisions will expire (“sunset”) on December 31st, 2012.

Comments: Great news. The most interesting Estate Planning provision (included in the Act) however, is the “portability” provision. This provision appears to allow both spouses to use the exemption (5 million dollars each) without requiring an A/B Trust. Any unused portion of the exemption at the first death can later be added to the surviving spouse’s exemption amount. An A/B Trust has been used to split a joint estate into two trusts at the first death (Bypass Trust and Survivor Trust) to ensure at least a portion of each spouse’s exemption is utilized. The A/B Trust will still be utilized but the “portability” provision is likely to decrease the frequency of these traditional trust splits.

Income Taxes: The Tax Relief/Job Creation Act of 2010 extended all tax rates (10, 15, 25, 28, 33 and 35%) for two years. The Act included an Alternative Minimum Tax (AMT) “Patch”, reducing the number of anticipated taxpayers affected in 2010 and 2011. The Act also included a one-year (2011) cut in payroll taxes. The temporary payroll tax cut will come as a reduction in the 6.2% Social Security Tax to 4.2% for employees.

Comments: The Act has been characterized by some as a tax cut. However, current tax rates for all taxpayers were simply extended for two years. If you are hoping for a little cash flow relief, the payroll tax cut is a nice surprise.

Capital Gain/Dividend Taxes: The Tax Relief/Job Creation Act of 2010 extended tax rates (0% for low income taxpayers, 15% for all other taxpayers) for capital gains and qualified dividends. These rates will also expire December 31st 2012.

Comments: Great news.

The Act contains some additional tax provisions (mostly just extensions), unemployment provisions and business incentives. Although a two-year extension is not ideal, it is nice to finally have something to plan for…


The above explanations are summarized. Please confirm all specifics with your tax professional. For questions regarding the “portability” provision, please contact your Estate Planning Attorney.

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