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

The Tax Relief Act of 2010 first reinstates the estate taxes effective for decedents dying and transfers made after December 31, 2009. The estate tax applicable exclusion amount is $5 million under the provision and is indexed for inflation for decedents dying in calendar years after 2011, and the maximum estate tax rate is 35 percent. [1]

Additionally, for gifts made after 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.

Also, for transfers made at death after December 31, 2010, the new law generally provides for ‘stepped-up” basis in property passing from the decedent; the carryover basis rules for gifts is unaffected. Gain or loss, if any, on the disposition of property is measured by the taxpayer’s amount realized (i.e., gross proceeds received) on the disposition, less the taxpayer’s basis in such property.[2] Basis generally represents a taxpayer’s investment in property, with certain adjustments required after acquisition. For example, basis is increased by the cost of capital improvements made to the property and decreased by depreciation deductions taken with respect to the property.

Under the new law the basis of property passing from a decedent’s estate is given the fair market value on the date of the decedent’s death (or, if the alternate valuation date is elected, the earlier of six months after the decedent’s death or the date the property is sold or distributed by the estate). This step up in basis generally eliminates the recognition of income on any appreciation of the property that occurred prior to the decedent’s death. If the value of property on the date of the decedent’s death was less than its adjusted basis, the property takes a stepped-down basis when it passes from a decedent’s estate. This stepped-down basis eliminates the tax benefit from any unrealized loss. [3]

Under the modified carryover basis regime, recipients of property acquired by gift, bequest, devise, or inheritance receive an adjusted basis or the fair market value of the property. Thus, the character of gain on the sale of property received from a gift is carried over to the donee. For example, real estate that has been depreciated and would be subject to recapture if sold by the donor will be subject to recapture if sold by the donee. [4]

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] TRA of 2010 § 302(a).

[2] IRC Sec. 1001.

[3] There is an exception to the rule that assets subject to the Federal estate tax receive stepped-up basis in the case of ‘‘income in respect of a decedent.’’ See IRC Sec. 1014(c). The basis of assets that are ‘‘income in respect of a decedent’’ is a carryover basis (i.e., the basis of such assets to the estate or heir is the same as it was in the hands of the decedent) increased by estate tax paid on that asset. Income in respect of a decedent includes rights to income that has been earned, but not recognized, by the date of death (e.g., wages that were earned, but not paid, before death), individual retirement accounts (IRAs), and assets held in accounts governed by section 401(k).

[4] U.S. Congress. Joint Committee on Taxation. General Explanation of Tax Legislation Enacted in the 111th Congress, 556 (JCS-2-11). Text from: Committee Reports. Available at: http://www.jct.gov/publications.html?func=showdown&id=3777 (last accessed April 6, 2011).

Why is this Topic Important to Wealth Managers? This discussion is focused on a hot topic in Washington and around the country.  The new 1099 reporting requirements that are expected to come into effect next year may be amended or removed all together. Wealth managers would be well served to be knowledgeable on the subject that not only affects clients and their businesses, but it also directly affects many wealth managers themselves who pay for goods and services as a trade or business. Thus, here at Advanced Markets we bring wealth managers in particular the most relevant and up-to-date information on the web.

The House of Representatives passed H.R. 4, the Small Business Paperwork Mandate Elimination Act of 2011 Thursday afternoon by majority vote (314-112, with 76 Democrats joining a unanimous House GOP).[1] The legislation, if passed by the Senate and signed into law by President Obama, would repeal an expansion currently scheduled to take effect in 2012 of information that businesses must report to the Internal Revenue Service on Form 1099.

Specifically, the new legislation would amend the Internal Revenue Code to repeal the expanded 1099 information reporting requirements on payments made to corporations, rental property expense payments, and payments for property and other gross proceeds.  The legislation would thus strike portions of section 6041 of the Internal Revenue Code which were added by the Patient Protection and Affordable Care Act of 2010 (PPA).

The PPA expanded tax information reporting requirements to require businesses to issue a Form 1099 for any payments to corporations (rather than just to individuals) and for any payments for property (rather than just for services or investment income) that exceed $600 per year per payee.  H.R. 4 would strike language requiring “amounts in consideration for property” and “gross proceeds” to be subject to 1099 reporting requirements under section 6041 of IRS Code in order to eliminate the expanded reporting requirements.  The bill would also repeal expanded information reporting requirements on rental property expense payments that are currently in effect.

According to the Joint Committee on Taxation, repealing these expanded 1099 information reporting requirements for rental property expense payments as well as certain payments of more than $600 will reduce taxes by approximately $24.7 billion over ten years. [2]

Section 6041 of the Internal Revenue Code outlines reporting requirements and generally requires information returns to be made by every person (payor) engaged in a trade or business that makes payments aggregating $600 or more in any taxable year to another person (payee) in the course of the payor’s trade or business.  The information returns must be filed with the Internal Revenue Service and corresponding statements must be sent to each payee.

Beginning in 2012, certain payments not previously subject to 1099 reporting requirements, including those made to corporations and those made for property, will become subject to the reporting requirements under the PPA.  The PPA and subsequent legislation expanded information reporting requirements of businesses for payments of $600 or more to any vendor and on rental property expense payments.  Some argue, these new requirements would likely impose a huge tax compliance burden on small businesses, forcing them to devote resources to tax filing instead of to business expansion and job creation.

Please check back with Advisorfyi and Advisorfx for more timely information on 1099 reporting.

Next week’s blogticles will present some interesting new topics including alternative risks.

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

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[1] John R. Parkinson.  ABC News. House Passes Repeal of 1099 Requirement.  http://blogs.abcnews.com/thenote/2011/03/house-passes-repeal-of-1099-requirement.html.  March 3, 2011.  Last Accessed March 3, 2011.

[2] JCX 12-11. Estimated Revenue Effects Of The Chairman’s Amendment In The Nature Of A Substitute To H.R. 4, The “Comprehensive 1099 Taxpayer Protection And Repayment Of Exchange Subsidy Overpayments Act Of 2011,” February 16, 2011.  http://www.jct.gov/publications.html?func=startdown&id=3736.  Last Accessed March 3, 2011.

Why is this Topic Important to Wealth Managers? Discusses the repeal of the health care legislation. Also, presents discussion about budgetary concerns regarding repeal.

One of the most exciting aspects of working in the wealth management industry is the need to adapt to constant change.  Over the past 12 months, the Legislator has created a fair amount of change that has been the topic of many discussions here at Advanced Markets FX and FYI.  Amusingly enough, we now examine how some of that could change yet again, starting with the Health Care Repeal.

Recently the House of Representatives passed the Repealing the Job-Killing Health Care Law Act, as introduced on January 5, 2011, which is now up for a Senate vote. That bill would repeal the Patient Protection and Affordable Care Act (PPACA) [1] and the provisions of the Health Care and Education Reconciliation Act of 2010 [2] that are related to health care.  Both of those laws were enacted in March 2010, and have been discussed in depth throughout the past year.

Among other things, PPACA and the provisions of the Reconciliation Act that are related to health care will do the following: establish a mandate for most legal residents of the United States to obtain health insurance; create insurance exchanges through which certain individuals and families will receive federal subsidies to substantially reduce the cost of purchasing health insurance coverage; expand eligibility for Medicaid; reduce the growth of Medicare’s payment rates for most services (relative to the growth rates projected under prior law); impose an excise tax on certain health insurance plans with relatively high premiums; impose certain taxes on individuals and families with relatively high incomes; and make various other changes to the federal tax code, Medicare, Medicaid, and other programs.

The Congressional Budget Office (CBO) has reviewed H.R. 2, and the financial affects its passage could have. [3] Although the findings are initial, the CBO first noted that the health care legislation contained a set of provisions designed to expand health insurance coverage, which CBO and Joint Committee on Taxation estimated would have a gross cost of about $930 billion and a net cost (after accounting for certain related changes in outlays and revenues) of about $780 billion over the 2012–2019 period. Repealing that legislation would eliminate such costs.

Secondly, the PPACA and the Reconciliation Act also included a number of provisions to reduce federal outlays and to increase federal revenues (mostly by increasing the Hospital Insurance payroll tax and imposing fees on certain manufacturers and insurers); in March, CBO and JCT estimated that those provisions unrelated to insurance coverage would, on balance, reduce direct spending by about $500 billion and increase revenues by about $410 billion over the

2012–2019 period.  The main variance the CBO estimates for the 2012-2019 period is $130 billion which is a result of projected increases of about $520 billion in revenues and about $390 billion in outlays.

Further, CBO’s estimates project repeal of the health care legislation would probably reduce the appropriations needed by the Internal Revenue Service by between $5 billion and $10 billion over 10 years. Similar savings would accrue to the Department of Health and Human Services.

Tomorrow’s blogticle will discuss 2011 market opportunities for wealth managers.

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

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[1] Public Law 111-148.

[2] Public Law 111-152.

[3] Douglas W. Elmendor, Director.  Congressional Budget Office.  Letter to the House Majority Leader.   http://www.cbo.gov/ftpdocs/120xx/doc12040/01-06-PPACA_Repeal.pdf.  January 6, 2011.  Last accessed January 22, 2010.