From Sunset to Sunrise…The New Tax Bill

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) into law. The Act extended the Bush tax cuts for an additional two years making significant changes to the laws governing estate, gift, and generation skipping transfer taxes. Provided below is a summary of a few of the key provisions:

Income Tax

The Act extends the Bush tax cuts for all taxpayers through 2012. For federal income tax purposes, the highest tax rate for ordinary income will remain at 35% instead of reverting to 39.6% on January 1, 2011. The long-term capital gains rate will remain at 15%, instead of increasing to 20% in 2011. And, the tax rate on qualified dividend income will remain at 15%, instead of increasing to ordinary income tax rates in 2011.

Estate, Gift, and Generation Skipping Transfer Taxes

The Act prevent for two years the estate, gift, and generation skipping transfer (“GST”) tax rate from increasing to 55% and the lifetime exemption for estate and GST taxes from reducing to $1 million on January 1, 2011. Essentially, the estate, gift and GST tax exemptions and rates will be $5 million and 35% for 2011 and 2012.

What is unique about the Act is for the first time, the estate tax exemption will be “portable” between spouses. This means that the surviving spouse will be able to utilize a deceased spouse’s unused exemption at the surviving spouses death.

There are no guarantees that the lifetime gift tax exemption will remain at $5 million after 2012. Many taxpayers who have already used their $1 million gift tax exemption will be able to make an additional $4 million gift during 2011 and 2012. If the exemption is reduced after 2012, it is unlikely that Congress would attempt to impose a retroactive gift tax on those who used the full exemption during 2011 and 2012. Using the full exemption to make gifts will allow individuals and families to avoid gift tax on the present amount of a gift, and avoid estate taxes on any appreciation in value after the gift that occurs prior to death.

Conclusion

The Act also included a number of additional provisions regarding options for heirs of people who died in 2010, extension of charitable rollovers from an IRA, an alternative minimum tax (AMT) patch, and more. The Act has created a significant planning opportunity for high net worth families and individuals. It is important to take advantage of these opportunities prior to the end of 2012. Although counterintuitive, it is very possible the estate, gift, and GST tax will be reduced from the 2011 and 2012 levels. As far as ordinary income, capital gains, and dividend tax rates are concerned it is anybody’s guess, but it is almost certain these rates will not be reduced. The question is whether or not they will stay the same or increase.

This material does not constitute tax, legal or accounting advice and neither HNWLifeInsurance.com nor any of its agents, employees or registered representatives is in the business of offering such advice. It was not intended or written for use and cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. Comments on taxation are based on HNWLifeInsurance.com’s understanding of current tax law, which is subject to change. Anyone interested in these transactions or topics should seek advice based on his or her particular circumstances from independent professional advisors.

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