More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- 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.
Tax issues will figure prominently in the goings-on in Washington this presidential election year, with the consensus among tax specialists being that Congress is most likely to address the estate tax when it decides late this year whether to extend the Bush tax cuts.
As it stands now, on Jan. 1, 2013, the estate tax will revert back to the 2001 level, which included a $1 million exemption and a 55% rate, from the current 35% top rate and $5 million portable exemption. When Congress addresses the Bush tax cuts, which will most likely be after the election, “an estate tax compromise will be part of that” discussion, says Jeremy Scott, an editor with Tax Analysts.
Based on the current makeup of Congress, Scott adds, “unless the [presidential] election produces a decisive result, [the rate] that’s in place now will be either permanently extended or extended for at least another 10 years. I would be surprised if the [estate tax] reverted” back to Clinton-era rates. “I think [the rate] will end up somewhere [near] where it is now.”
Another short-term extension, Scott opines, is also unlikely as Congress “doesn’t want to deal with this issue every two years.”
But Robert Miller, president of the National Association of Insurance and Financial Advisors, told me that during NAIFA’s “Day on the Hill” in late January, he spoke with at least eight congressmen who said lawmakers would likely “extend the current [estate tax] rates for another year.”
Joe Lieber of Washington Analysis, which conducts research on Washington policy matters for institutional investors, said he expects the Bush tax cuts to expire at the end of this year, “meaning that the financial markets will begin to price in a higher dividend rate if they haven’t already.” Expiration of the Bush tax cuts is a significant issue since it would raise taxes on virtually every taxpayer, change the rates on dividends to ordinary income, raise capital gain rates, bring back the marriage penalty, eliminate the child tax credit and raise the alternative minimum tax (AMT).
As for the payroll tax cut extension, which expired on Feb. 29, Lieber says Congress will likely approve a 10-month extension. But Christopher Bergin, president of Tax Analysts, says there’s a danger for Social Security if Congress continues to “extend” the payroll tax cut as opposed to finding a long-term solution. “If [Congress] keeps extending this payroll tax cut there’s a threat to Social Security that no one is talking about, of it not becoming a separate system but just another budget item” for Congress.
President Barack Obama said during his State of the Union speech in January that he wants to let the Bush tax cuts expire. “When it comes to the deficit, we’ve already agreed to more than $2 trillion in cuts and savings. But we need to do more, and that means making choices,” Obama said. “Right now, we’re poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2% of Americans. Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households. Right now, Warren Buffett pays a lower tax rate than his secretary.”
Obama asked in the speech: “Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else—like education and medical research, a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both.”
New Assault on Estate Tax Itself
However, Republicans have been trying to kill the estate tax outright for some time, with the most recent attack coming from Rep. Tim Huelskamp, R-Kan., who introduced a bill on Jan. 23, H.R. 3804, which would permanently repeal the estate tax and the alternative minimum tax.
Scott says that Huelscamp’s bill “undoes everything that Obama has done—it eliminates the estate tax, which is a long-standing Republican position, and it permanently extends the Bush tax cuts for all income levels.” The House, he says, “might pass [the bill], but I’ve heard the Republican leadership may not even take up an estate tax bill in the near future.”
What’s more, he says, Republicans “certainly aren’t going to get the AMT repealed anytime soon because that would just blow the budget apart.”
Douglas Elmendorf, director of the Congressional Budget Office, told Congress in January during his testimony on the CBO’s just-released “Budget and Economic Outlook: Fiscal Years 2012 to 2022,” that the AMT is indexed for inflation after 2011. Under current law, Elmendorf said, its parameters are fixed, and the number of taxpayers affected by the AMT will jump from 4 million in calendar year 2011 to 30 million in 2012.
Another looming issue is sequestration cuts, the automatic spending cuts that would kick in on Jan. 1, 2013 that are divided equally between defense and non-defense discretionary programs. Programs excluded from the automatic cuts include Social Security, Medicaid and veterans’ benefits. The failure of the Congressional supercommittee to act will cause an across-the-board cut in federal spending. Lieber of Washington Analysis said that “there is a real risk that at least the first year’s $109 billion sequestration [cuts] will go into effect.”