Geithner to Get Your Green

In the July 8 blog entitled "Bush Tax Cuts," I stated that Congress must act to avoid allowing many of the Bush tax cuts to expire in 2011. Congressional inaction will raise taxes across the board (including income tax rates for low and middle income earners).

The the following article provides that the Treasury Secretary, Timothy Geithner, said "the White House would allow taxes on top earners to increase in 2011 as part of an effort to bring down the U.S. budget deficit. He said the White House plans to extend expiring tax cuts for middle- and lower-income Americans, and expects to undertake a broader revision of the tax code next year."

Although I want to believe Geithner, I don't think Congress will get their act together soon before the cuts expire. However, I think we can expect to see some speeping tax reform some time in 2011, and high incomers ($250,000 +) have a big bullseye on their back.

Plan for the worst, but hope for the best.

Are You THAT Passionate about Estate Planning?

For 2010, the federal estate tax has been repealed. But due to Congressional inaction, it is set to come roaring back in 2011 with only a $1 million exemption amount (the amount that each person may shelter from estate taxes when they die).

Here is an interesting article from the Wall Street Journal that addresses how the failure to address the estate tax issue has incentivized death.

The article indicates that it is unlikely Congress will apply the estate tax retroactively to Jan. 1, 2010. As each day passes, it become less and less likely that Congress will pass new legislation to increase the exemption amount in 2011.

Interestingly enough, our state passed the Death with Dignity Act in 2009. The law allows terminally ill Washington residents, who have less than six months to live, to request a lethal dosage of medication. The law requires that the patient submit a form to request the administration of the life ending medication. The Washington Department of Health's website indicates that it collected 64 forms in 2009 and 49 form in 2010. The questions becomes whether the number of forms collected will increase in 2011 as a result of the the federal estate tax laws.

I hope no one is that passionate about estate planning.

Bush Tax Cuts

During his first term in office, George W. Bush and friends passed several different tax cuts. Bush and company could not obtain enough support to the make cuts permanent. As a result, many of the tax cuts are scheduled to "sunset," or revert back to the provisions that were in effect before the cuts were made, on January 1, 2011.

Sunsetting of the Bush tax cuts will affect nearly all taxpayers in the United States. Here is an article from the Wall Street Journal about how the expiration of some of the Bush tax cuts will be felt by taxpayers.

A few of the notables include changes to individual tax rates as well as changes to the capital gains and dividend rates. If Congress does not act then the current individual tax rates of 10%, 15%, 25%, 28%, 33% and 35% will be replaced with the higher rates of 15%, 28%, 31%, 36% and 39.6%. In addition, without Congressional action, the current 15% tax on long-term capital gains will be revert back to 20%, while the 15% dividend rate will increase to 39.6%.

One change involves the estate tax exemption. In 2009, each person could use a $3.5 million exemption to shelter assets from the estate tax, which carries with it a 45% average rate. If the Bush tax cuts sunset without Congressional action, then the exemption will revert back to a $1 million exemption and with a top rate of 55%.

In short, lawmakers must address these and many other tax issues by the end of the year. If they don't, death taxes will rise, tax rates will rise, and many tax benefits will expire.

Will lawmakers act? So far Congress has been preoccupied with healthcare reform and November elections, and according to the Wall Street Journal, Congress has fewer than 40 working days left before November with no lame-duck session scheduled. What do you think?

I think the Bush tax cuts may be going the way of the Dodo.

SECA and S Corps - Wait and See

The Self-Employment Contributions Act (SECA) imposes a 15.3% tax on wages earned by self-employed people. Many self-employed business owners employ a popular tax saving device and pay themselves a "reasonable" wage and receive the rest of the profit as a dividend. The dividends are exempt from the SECA tax while the wages are not. (Keep in mind the dividends and wages are subject to the income tax at the individual's regular rate).

Lawmakers are fully aware of this and have attempted to impose a SECA tax that will hit all profits of service firms, including accounting, law, health, engineering, architecture, investment management, brokerage, and consulting firms.

The American Institute of Certified Public Accountants (AICPA) has pushed hard to strike this measure, and as a result it may not become law.

We will just have to wait and see.


Sources: The Kiplinger Tax Leter, Vol. 85, No. 11, May 28, 2010

Death Yes...Taxes...Maybe Not

Here is a short article about a Texas oil tycoon, Dan Duncan (pictured below), that I have mentioned to several of our clients. As many of you are aware, the federal estate tax has been repealed for 2010. Mr. Duncan died in 2010 with about a $9 billion dollar estate. If Mr. Duncan died three months earlier, $9 billion would have been subject to a federal estate tax of at least 45 percent, which means the IRS would have received about $4 billion from Duncan's estate. He couldn't have passed at a better time for estate planning purposes (mixed emotions from the heirs I'm sure).

Uncle Sam may find comfort in the fact that the heirs will still have to pay capital gains taxes upon the sale of some of his assets, as well as the fact that Congress may still retroactively apply the federal estate tax to January 1, 2010. But if Congress wants to avoid a strong Constitutional challenge from the heirs, they'll need to get their head out of the healthcare game and into tax policy before year end.