Why is this Topic Important to Wealth Managers? This blogticle represents part one of a five in a series on the estate and gift tax and portability of the spousal credit. Most wealth managers are cognizant of the new changes to the federal estate and gift tax structure with an increased exemption amount of five million dollars. This week we discuss the current estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

As most wealth managers are aware, extension of the Bush tax cuts created a number of changes related to the gift and estate tax. For a better understanding of the new federal gift and estate tax provisions, and how they relate to clients’ estate plans, the prior law will first be discussed.

In general, a gift tax is imposed on certain lifetime transfers and an estate tax is imposed on certain transfers at death;  the federal gift and estate tax are taxes on the right to transfer property; not a tax on the underlying property itself.[1] In 2001, the federal estate tax exemption was $675,000 with a top estate tax rate of 55%.[2] When the Bush administration passed its tax cut legislation, the federal estate tax exemption underwent a series of increases.  By 2009, the exemption escalated to $3.5 million with a top tax rate of 45%.[3] The federal estate tax exemption was repealed in 2010, and the Bush’s tax cuts sunset provisions were set to expire in 2011, which meant that the federal estate tax would have been $1 million with a top rate of 55%.[4]

Nevertheless, President Obama’s tax compromise – the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (Tax Relief Act of 2010 or TRA of 2010) – which came into effect on December 17, 2010, changed the direction of expiring provisions. [5] The Tax Relief Act of 2010 contains new sunset provisions which extend certain tax cuts and provides for gift and estate tax amendments.

Moreover, the Tax Relief Act of 2010 created a number of favorable conditions that may  be beneficial to your clients—but in order to fully take advantage of these changes  it will help to review the  Tax Relief Act of 2010  and how it directly relates to client planning.

As presented in the AMAFX Advisors Journal, whether or not to give substantial lifetime gifts in 2011 and 2012 is going to be a hot topic between now and the end of 2012. But deciding whether to take advantage of the record high ($5 million) gift, estate and GST tax exclusion amount and low (35%) transfer tax rate isn’t a trivial matter.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of the federal estate tax, the federal gift tax, and the GST tax, see AMAFX Advisor’s Main Library: A – Federal Estate Tax General, A – Nature and Background Of The Federal Gift Tax, and A – Generation Skipping Transfers Explained.

Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] AMAFX-AUS Main Library. The Federal Estate Tax.  http://www.advisorfx.com/articles/f2_1_12_1090.aspx?action=13 (last accessed April 6, 2011).

[2] Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson, The Estate Tax: Ninety Years and Counting, 122. Available at: http://www.irs.gov/pub/irs-soi/ninetyestate.pdf (last accessed April 8, 2011).

[3] Jacobson, Raub, and Johnson, supra note 2, at 124.

[4] Id.

[5] Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010, P.L. 111-312; U.S. Congress. House of Representatives. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, 24 (H.R. 4853). Available at:  http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf (last accessed April 6, 2011).

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) extended the income tax deduction for state and local sales taxes through December 31, 2011.  The deduction expired on January 1, 2009, but Congress amended the provision retroactively, which will allow taxpayers to take the deduction on their 2010 taxes.  The deduction, which has been slated to expire a number of times, has been revived by Congress repeatedly since it was introduced but has not yet been made a permanent part of the Code.   Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the Tax Relief Act of 2010 in Advisor’s Journal, see Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011 (CC 11-01), Obama’s Social Security Tax Holiday: Penny Wise and Pound Foolish? (CC 10-119), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), & 2010 Estates: To Elect or Not to Elect (CC 10-124).

For in-depth analysis of income tax deductions, see Advisor’s Main Library: B4—Business Income and Deductions.

We invite your questions and comments by posting them or by calling the Panel of Experts.

Some taxpayers are going to have to wait until mid-to-late February to file their 2010 income tax returns, delaying much needed refunds and potentially clogging up the system for other taxpayers. The IRS is blaming the filing delay on Congress waiting until the end of December to pass the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, H.R. 4853 (Tax Relief Act), which includes a bevy of tax provision extensions, a new two-year estate tax, and a one-year, 2 percent Social Security tax holiday.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the Tax Relief Act of 2010 in Advisor’s Journal, see Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011 (CC 11-01), Obama’s Social Security Tax Holiday: Penny Wise and Pound Foolish? (CC 10-119), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), and 2010 Estates: To Elect or Not to Elect (CC 10-124).

The Tax Relief Act will extend unemployment benefits for about 2 million unemployed persons in the month of December and a total of 7 million over the next year.  Federal unemployment benefits amount to only about $260 per week, but it is money that families need for basic necessities—money that flows right back out into the economy.  If the extension had not passed, the average affected household’s income would have dropped by one-third. The corresponding drop in spending would have further increased job losses, further delaying the already slow recovery.   Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of President Obama’s tax agreement in Advisor’s Journal, see Obama Tax Agreement Faces Stiff Resistance in Congress (CC 10-112), Obama Tax Agreement Passed by House (CC 10-117) and Obama’s Social Security Tax Holiday: Penny Wise and Pound Foolish? (CC 10-119).

President Obama’s tax compromise—the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act)—includes a much needed alternative minimum (AMT) patch that will keep middle class taxpayers from being caught up in the AMT in 2010 and 2011. Without the patch, an additional 20 million taxpayers would have been snared by the AMT in 2010.

As reported earlier this year in Advisor’s Journal [see Finance Committee Promises AMT Patch (CC 10-100)], the IRS previously indicated that it would be forced to delay the AMT filing date if Congress did not pass a patch until late 2010. Any delay would hurt taxpayers who are owed an AMT refund. The patch was signed on December 17, 2010, but it is not clear whether that late date of passage will push back next year’s AMT filing date.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the AMT in Advisor’s Journal, see Finance Committee Promises AMT Patch (CC 10-100).

For in-depth analysis of the AMT, see Advisor’s Main Library: Section 19.D—Additional Taxes; Credits For Prepayments.

Did Congress finally settle the estate tax confusion when it passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) on December 16? Although the estate tax treatment of estates of decedents dying in 2011 and 2012 is crystal clear, most of our clients will outlive the current estate tax regime, and we will be stuck in the same spot we were for the last half of 2010, wondering what the next year holds.

And what about the estates of decedents dying in 2010? Under the Tax Relief Act, estates of decedents dying in 2010 have a choice. They can elect to have the estate subjected to an estate tax regime with an exclusion amount of $5,000,000 (unified credit of $1,730,000) and an estate tax rate of 35 percent. Beneficiaries of these estates will receive the benefit of the stepped-up basis rules applicable prior to 2010.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Obama’s tax agreement, including its estate tax provisions, in Advisor’s Journal, see Obama Tax Agreement Faces Stiff Resistance in Congress (CC 10-112) and Obama Tax Agreement Passed by House (CC 10-117).

For in-depth analysis of the estate tax, see Estate, Gift and GST Taxes.

We invite your questions and comments by posting them or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers?  Discusses new tax rate brackets beginning next colander year (2011).  Also, briefly discusses tax rate tables generally.

In 2001, the Economic Growth and Tax Relief Reconciliation Act first created a new 10-percent regular income tax bracket for a portion of taxable income that was previously taxed at 15 percent.  That law also reduced the other regular income tax rates. The otherwise applicable regular income tax rates of 28 percent, 31 percent, 36 percent and 39.6 percent were reduced to 25 percent, 28 percent, 33 percent, and 35 percent, respectively.

Under Section 101 of the new Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act of 2010, the law creates an extension of the taxable income brackets created almost a decade ago.

Generally, a taxpayer determines his or her tax liability by applying the tax rate schedules (or the tax tables) to his or her taxable income. The rate schedules are broken into several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer’s income increases. Separate rate schedules apply based on an individual’s filing status.

Below are the new tax rate tables for those filing as single taxpayers, married filing jointly, as well as head of household.

For those filing as single taxpayers the new income tax rates, effective after 2010 are:

Not over $8,500	10% of the taxable income
Over $8,500 but not over $34,500	$850 plus 15% of the excess over $8,500
Over $34,500 but not over $83,600	$4,750 plus 25% of the excess over $34,500
Over $83,600 but not over $174,400	$17,025 plus 28% of the excess over $83,600
Over $174,400 but not over $379,150	$42,449 plus 33% of the excess over $174,400
Over $379,150	$110,016.50 plus 35% of the excess over $379,150

For married individuals filing jointly, the new income tax rates are:

Not over $17,000	10% of the taxable income
Over $17,000 but not over $69,000	$1,700 plus 15% of the excess over $17,000
Over $69,000 but not over $139,350	$9,500 plus 25% of the excess over $69,000
Over $139,350 but not over $212,300	$27,087.50 plus 28% of the excess over $139,350
Over $212,300 but not over $379,150	$47,513.50 plus 33% of the excess over $379,150
Over $379,150	$102,574 plus 35% of the excess over $379,150

For those filing as head of household, the new income tax rates are:

Not over $11,950	10% of the taxable income
Over $11,950 but not over $45,550	$1,195 plus 15% of the excess over $11,950
Over $45,550 but not over $117,650	$6,235 plus 25% of the excess over $45,550
Over $117,650 but not over $190,550	$24,260 plus 28% of the excess over $117,650
Over $190,550 but not over $373,650	$44,672 plus 33% of the excess over $190,550
Over $373,650	$105,095 plus 35% of the excess over $373,650

Tomorrow’s blog will continue to discuss pertinent provisions of the new Tax Cuts and how they relate to wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Discusses relevant provisions of the “Obama Tax Cuts”.  Provides a topical overview of pertinent provisions for wealth managers.

On Friday, President Obama signed into legislation, what is quickly becoming known as the Obama Tax Cuts, which extend tax breaks initially created by the George Bush Administration about a decade ago.  For the previous discussions and various versions of this “long and winding road” of the passage of this new tax law – see Tax Deal Reached

The new tax law “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (HR. 4853)“ provides an extension for two years (unless otherwise noted), of generally the following (not all inclusive):

The continuation of the 10, 15, 25, 28, 33, 35-percent regular income tax brackets.  Sec 101.

The continuance of the removal of itemized deduction limit and personal exemption phase-out.  Sec 101.

Child tax credit extensions along with increased earnings threshold for credit determination.  Sec. 101 and 103.

Increases the basic standard deduction for a married couples filing jointly to twice that of the standard deduction for unmarried individuals.  Sec 101

Extends certain earned income tax credit provisions including for determination of application of tax credit to income tax liability. Sec 101 and Sec 103.

Extends qualified dividend income taxable at net capital gains rates. Sec 102

Extends the maximum rate of tax on adjusted net capital gains to 15 percent. Sec 102.

Extends Hope and American Opportunity Tax Credit with regards to secondary education.  Sec 103.

Alternative Minimum Tax (AMT) exemption amounts for taxable years 2010; $72,450, for married filing jointly and $47,450, for unmarried individuals, and 2011; $74,450, for married filing jointly, and $48,450 for unmarried individuals. Sec 201.

The provision reinstates the estate and generation skipping transfer taxes with exclusion amount of $5 million, with a maximum estate tax rate of 35 percent.  Sec 301-304.

For gifts made in 2010, exclusion amount is $1 million, and the gift tax rate is 35 percent, for gifts made December 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35 percent.  Sec 301-304.

The generation skipping transfer tax exemption continues in an amount of $5 million.  Generation skipping transfer tax rate for transfers made during 2010 is zero percent. The generation skipping transfer tax rate for transfers made after 2010 is equal to the highest estate and gift tax rate in effect for such year (35 percent for 2011 and 2012).  Sec 301-304.

Repeals the modified carryover basis rules—now a recipient of property acquired from a decedent will generally receive a “step-up” or fair market value basis. Sec 301-304.

Extends and expands the additional first-year depreciation to equal 100 percent of the cost of qualified property placed in service after September 8, 2010 and before January 1, 2012, and provides for a 50 percent first-year additional depreciation deduction for qualified property placed in service after December 31, 2011 and before January 1, 2013.  Sec 401.

Starting in 2012, the maximum amount a taxpayer may expense is $125,000 of the cost of qualifying property placed in service for the taxable year. The $125,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $500,000.  Sec 402.

Reduces the employee FICA tax by two percentage points for one year (2011 only). Also reduces self-employment taxes tax by two percentage points for taxable years of individuals that begin in 2011. Sec  601.

The Act extends the rules regarding contributions of capital gain real property for conservation/charity purposes for two years for contributions made in taxable years beginning before January 1, 2012. Sec 725.

We provide a link below to the actual Bill (now new law) that you may look at each section listed above after each change.  Then, we provide a link to the Congressional explanation of the changes:

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (HR. 4853) Bill: http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853eas2/pdf/BILLS-111hr4853eas2.pdf Last Accessed 12/19/2010.

Joint Committee on Taxation.  Technical Explanation of the Revenue Provisions Contained in the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” Scheduled For Consideration By The United States Senate. JCX-55-10.  December 10, 2010.  Accessible through: http://www.jct.gov/publications.html?func=startdown&id=3716.  Last Accessed 12/19/2010.

Tomorrow’s blog will discuss certain provisions of the tax cuts in more detail.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

President Obama’s tax compromise—the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010—passed the House late Thursday (Dec. 16) by a margin of 277-148. The Bill, which was passed by the Senate on Wednesday (Dec. 15), was signed into law by President Obama.

The act, which extends the Bush tax cuts for two years for taxpayers at all income levels, includes the following provisions (among others):  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of congressional wrangling over the Bush tax cuts in Advisor’s Journal, seeObama Tax Agreement Faces Stiff Resistance in Congress (CC 10-112), Lame Duck Agenda Packed with Tax Business (CC 10-108), Obama Administration May Be Willing to Extend Bush Tax Cuts for More Taxpayers (CC 10-93), and CBO Analysis Supports Extending Tax Cuts (CC 10-49).