Hot Tax Issues of the Day

Originally published in the CA and NV Examiner 11/19/2010 issue     

     Now that the midterm election is over we now know that we have a divided government. The House of Congress is now controlled by the Republicans and we know that their top priority is to repeal the Obama Health Care. But equally important to the Republicans is the issue on taxes. From my readings I came across the still uncertain and unresolved burning tax issues. But what is certain is that Congress will reconvene on Nov 15 and leaders from both houses will meet with the White House on Nov 18. Both Chambers are still under control by the Democrats until power passes in January. The IRS urgently needs to know the right computations on next year’s withholding taxes as well as payroll executives who require at least three weeks to install a new system.

     While there’s a laundry list of tax issues that Congress needs to resolve, the following  seem to be the most outstanding:

     INCOME TAX. As we all know the Bush tax rates will expire by the end of the year. The top rate will go back to almost 40%. We have been told by the Obama Administration that the cuts will only be extended for those making less than $250,000.00 ($200,000 for singles). The Republicans disagree. They want the extensions be given to everyone and these cuts be made permanent.

      Are there other alternatives being considered by the Administration? Yes. A possibility will be a one to two year extension for everyone. This still is not acceptable to the Republicans. A possible compromise would be to extend permanently the tax cuts for those making less than a $1million.  As of press time, I have learned that the White House is amenable to extend the Bush tax cuts. But the details have not been given yet to the media as everyone await President Obama back from his meeting at the G20. 

     For those who are doing tax planning it might be good to accelerate income and take deductions at a later time. Even if the tax cuts shall be extended taxes are likely to be up sometime in 2012 or 2013.  We need to prepare for this likely event.

     CAPITAL GAINS AND DIVIDENDS. If the Bush tax cuts are not extended capital gains will go up to 20% and dividends will revert to being taxed as ordinary income with 39.6% as top rate. The fate of these rates will likely be parallel to the decision on the Income Tax rates.

     Tax planners suggest that we consider taking dividends from C-Corps before the end of the year if the extension on tax cuts will not materialize. Again for high earners expect tax increases in the future even if there is an extension.

     ESTATE TAX. The status of the estate tax is chaotic at this point as described by Laura Sanders in her article in the Wall Street Journal. She stated that the estate tax lapsed last Jan.1 and will return on Jan 1, 2011, with an exemption of only $1million per individual and a 55% top rate. The House bill which was passed last year would have extended 2009’s exemption of $3.5 million and top rate of 45%. The Senate’s inaction, due to their internal contradictions, was unable to deliver any finality on the issue all year long. Some Senators want to keep the 2009 rates, while some want to raise the exemption to $5 million and still others just want to repeal the whole thing altogether.

      At this point, it is still unclear if a fix would be coming. There are strong sentiments to allow estates of people who died this year a choice of which rules to use. We don’t know yet if this would be allowed.

     So what would you do if you are an heir or an executor of someone who passed away in 2010? Well, determine if the 2010 rules would be the best. If not, use the 2009 rate if it would be allowed. But in all likelihood, it may not be good for those with assets of $1.3 million to $4 million.