More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
As the results of the 2010 election are assessed, wealth managers are looking ahead to what the lame-duck Congress may do before year-end to settle several tax issues that are up in the air. Tax cuts enacted by President George W. Bush contain sunset provisions that are scheduled to take effect on Jan.1, 2011, which would raise the tax rates on wages, capital gains, dividends and estates—unless Congress acts before year-end to extend the lower rates .
“We believe coming out of the election, from the tax reform and legislation standpoint, [Senate Majority Leader] Harry Reid’s [D-Nev.] reelection is huge,” says Tim Speiss, partner and chairman, Personal Wealth Advisors, at EisnerAmper LLP. The same goes for “Nancy Pelosi stepping down as Speaker of the House,” and turning that over to “Rep. John Boehner, R-Ohio.”
The Senate will retain a Democratic majority while the House will have a Republican majority. In gubernatorial races around the country, Republicans picked up seats while Democrats lost governorships. The message, Speiss told AdvisorOne.com in an exclusive interview on Nov. 3, is “smaller federal government, less spending…and more state control.” In terms of federal spending, “it’s not just the deficit, it’s the balance sheet.” Speiss adds.
Personal Income Tax
To keep it in perspective, if Congress does not act, and, “if Clinton tax rates come back on Jan. 1, at 39.6% [for top earners], within the first 18-months there would be $300 billion in additional tax receipts” coming in, Speiss explains. He observes that this would eliminate “one-third of the deficit.”
But, asks Speiss: “Would you really want to be raising taxes right now in the current [economic] environment?”
President Barack Obama has proposed keeping the Bush tax cuts for personal income temporarily in place for families making less than $250,000. See “Gauging the Impact of Obama’s Proposed Tax Plan, Part II.”
It isn’t about more taxes coming in, Speiss notes; it is looking “more and more like [there will be] extension of the current rates—and to pay for that, spending cuts.” He adds: “The administration might come out in favor of extending the current rates in an effort to show leadership and guidance.”
Capital Gains and Dividends Tax
Speiss also expects that the lower capital gains and qualified long-term dividends rates—also slated to sunset on Dec. 31—will be extended rather than raised; although it is “possible they could sneak a 20% rate in there.”
The Alternative Minimum Tax
The alternative minimum tax (AMT)—meant to ensure that the wealthiest taxpayers do pay some taxes—is another thorny tax issue that Congress has taken up a number of times in recent years. That tax affects more and more middle-class taxpayers, in addition to the very wealthy. Speiss expects that the threshold for the AMT will be raised.
The estate tax expired at the end of 2009 with no new estate tax legislation in place—so there is no tax on the estates of persons who die in 2010. The estate tax comes back in 2011—at higher rates than those in 2009—unless Congress acts before year-end. But, “unlike the income tax,” Speiss says, “nobody pays attention to the estate tax; it’s not a hot, burning issue. It’s tailored to effective planning.” Speiss believes that there will be an estate tax plan enacted in 2011 “retroactive to Jan. 1.”
Small Business Tax
On Sept. 27, Obama signed The Small Business Lending Fund Act of 2010, to provide aid to small businesses. The legislation includes $12 billion in tax breaks and would create a $30 billion facility to expand credit access to small businesses. See, “The Impact on Small Businesses of the Jobs Act: Part I.”