• No Estate or Income Tax Legislation -- Yet
  • August 24, 2010
  • Law Firm: Loeb Loeb LLP - Los Angeles Office
  • As of the beginning of August, Congress has not passed any of the tax legislation that has been expected. The widely anticipated 2010 estate tax fix never happened and as of now there is no estate or generation skipping tax for 2010 and only limited basis step up to assets of decedents dying in 2010. There is still a gift tax with a $1,000,000 lifetime exemption but for 2010 the maximum rate is 35%. Beginning January 1, 2011, the maximum estate, generation skipping and gift tax rates will revert to 55% and the lifetime exemption for all of these taxes will go back to $1,000,000.

    Various proposals have been floated for a permanent fix, but none has gained traction in Congress on both sides of the aisle. The range of maximum rates under consideration is running between 35% and 45%, although a couple of outlier proposals have higher rates. The proposed ranges for the lifetime exemption run between $3,500,000 and $5,000,000.

    It was also expected that legislation would be passed requiring a 10 year minimum term for grantor retained annuity trusts (“GRATS”). These provisions have passed the House more than once, most recently in H.R. 4899, a supplemental spending bill. However, the Senate passed that bill last month without the GRAT provision and the House relented. The House has reintroduced the GRAT legislation in H.R. 5982, the Small Business Tax Relief Act of 2010, which is pending.

    On the income tax side, it looked like the partnership provision taxing carried interests as ordinary income was almost sure to pass. It passed the House again as part of H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010. The provision was significantly diluted to provide for a mix of ordinary income and capital gain and the legislation then came within three votes of passing the Senate. The Democrats in Congress will not let this die; we will see it again.

    In the broader tax picture, as of now the Bush tax cuts will expire at the end of this year. On January 1, 2011, the maximum rate on dividend income will go up from 15% to 39.5%, the rate on other ordinary income will go up from 35% to 39.6% and the rate on long term capital gains will go up from 15% to 20%. These provisions have been in the news a lot lately. Virtually all Republicans and a few Democrats in Congress believe that any tax increase now would jeopardize the economic recovery. The administration and most Democrats in Congress believe that current tax rates should be preserved for families earning up to $250,000, but that taxes should be increased on those earning more. President Obama previously favored limiting the top tax rate on dividends to 20% even for high income taxpayers, but now may have changed his position to favor a higher rate for high income taxpayers. Without legislation being enacted, maximum tax rate on dividends will increase to 39.6% on January 1, 2011. In 2013, when the new Medicare tax kicks in, this top rate will increase another 3.8% to 43.4%. This debate is likely to intensify as we get closer to the November elections.