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TagsBY ROBERT DiQUOLLO
Between now and Dec. 31, Congress will decide whether to extend the Bush income and estate tax cuts of 2001. What happens in Congress, and in the upcoming elections, will have a significant impact on your income tax and estate planning.
If the Bush tax cuts of 2001 are not extended, we will witness one of the largest tax increases in history.
In 2001, President George W. Bush proposed, and Congress enacted, a number of income and estate tax reductions. Congress passed these cuts through a "reconciliation" process with the then-minority Democratic Congress. This reconciliation resulted in these cuts being "sunsetted" after 2010.
Income Tax
The table below compares 2010 tax rates with those that will take effect in 2011 if Congress does not act:
The biggest change, however, would be in the qualified dividend area, which if not fixed, will increase from 15% to a maximum of 39.6%. This is highlighted in the chart below.
Also highlighted is the effect on the tax rates for 2013 when the new health care laws are effective and impose an additional 3.8% tax on individual taxpayers whose modified adjusted gross income exceeds $200,000, or $250,000 for married couples filing joint returns.
The Estate Tax
The estate tax in 2011, and going forward, will also be significantly more onerous if Congress does not act.
In 2009 an individual could leave up to $3.5 million to a non-spouse beneficiary without incurring a federal estate tax. For the current year, 2010, there is no federal estate tax. You may recall hearing that their heirs of George Steinbrenner, the late owner of the New York Yankees who died in July, saved almost $500 million in federal estate taxes, on a $1 billion estate. This pales in comparison to Dan Duncan, owner of a natural gas processing plants in Texas, whose heirs will inherit over $10 billion with no estate tax.
However, if Congress does not act, the federal estate tax is reborn on January 1, 2011 and will tax all inheritances to non-spouse beneficiaries in excess of only $1 million dollars, with progressive rates going as high as 55%. If billionaire Dan Duncan died in 2011 rather than 2010, his estate would have paid up to $5.5 billion to Uncle Sam (assuming the estate was left to his children) versus the actual amount of "zero."
See the chart below for the comparisons.
Robert J. DiQuollo, CFP®, CPA, is founder, president and senior financial advisor of Brinton Eaton, a wealth advisory firm in Madison, NJ. He specializes in financial planning, tax planning, and investment management.
