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Financial Planning > Tax Planning

Tax Bill: Will House Let H.R. 4853 Make Magic?

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WASHINGTON BUREAU – The House is unlikely to take action on H.R. 4853, a tax compromise bill that would stabilize estate tax rules for 2 years, until Thursday, House officials say.

Members of the Senate today voted 81-19 to pass the bill, despite the misgivings of liberal Democrats who say the estate tax provisions and other provisions in the bill are too generous to the rich and Republican budget hawks who say the bill would increase the federal budget deficit.

Vice President Joseph Biden represented the Obama administration in deal negotiations Joe Bidenwith Senate Majority Leader Mitch McConnell, R-Ky., and incoming House Speaker John Boehner, R-Ohio.

In the House, Republican support for the bill has been strong; Democrats have been making highly visible efforts to stop the bill.

H.R. 4853 would:

  • Extend many Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) tax cuts for 2 years, including capital gains relief provisions and tax incentives of interest to middle-income taxpayers, such as the child tax credit and the earned income tax credit.
  • Extend Internal Revenue Code “Subpart F” tax rules for 2 years. The government has been letting insurers defer tax payments on income earned by foreign subsidiaries for a number of years, industry officials say. If Congress lets the provisions expire, U.S. insurers would have to pay taxes on the income earned by the foreign subsidiaries even if that income is not repatriated back to the United States.
  • Temporarily cut the rate for the individual payroll taxes used to fund Social Security by 2 percentage points, to 4.2%.
  • Let businesses expense 100% of investments in 2011. The write-off would be retroactive to September 2010.
  • Preserve extended unemployment insurance benefits for 13 months, at an estimated cost of $56 billion.
  • Cost about $315 billion, according to the Congressional Research Service.

Under EGTRRA rules, the estate tax phased out this year and was supposed to spring back to 2001 levels – with a $1 million exemption and a 55% top tax rate – in 2011.

H.R. 4853 would set the personal estate tax exemption at $5 million and the top rate at 35%. After 2011, the exemption would be indexed for inflation.

The key provisions for the insurance industry are the estate tax provisions, observers say.


From a “taxpayer’s perspective, this legislation is magical,” says Andrew Katzenstein, a partner in the personal planning department in the Los Angeles office of Proskauer Rose L.L.P. “There are things in this bill that will allow us to do things we never expected we would be able to do.”

For users of “Crummey trusts” that contain life insurance policies, one provision answers questions about the interaction of the anticipated EGTRRA phase out of the generation-skipping tax (GST) in 2010 with traditional arrangements for allocating the GST exemption, Katzenstein says,

Before H.R. 4853 was proposed, estate planning practitioners and families using Crummey trusts were concerned about the implications of the lack of a GST in 2010, Katzenstein says.

“Before this legislation was crafted, there was no generation-skipping tax for 2010, so when people made gifts to insurance trusts of the money to pay the premiums–even if those gifts were not subject to gift tax because the trust was a Crummey trust — in 2010 there was no way to make those gifts exempt from the generation-skipping tax in future years,” Katzenstein says.

“The legislation solves the problem, because the generation-skipping tax is again made applicable to gifts made in 2010, and the increase in the generation-skipping tax exemption provided by the proposed law to $5 million provides plenty of exemption to allocate,” Katzenstein says..


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