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TAX NEWS - DECEMber 2009 | |||||||||||||||||||||||||||||||||||||||
Congress takes an incomplete on extenders, estate tax fixThe House earlier this month approved separate freestanding bills to permanently extend the estate tax at its 2009 rates and exemption amounts and to extend for one year some 45 popular tax credits and incentives that are scheduled to expire on December 31. Although the Senate is likely to be in session during the week of December 21, a floor schedule crowded by the health care debate plus disagreements over how to reform the estate tax have prevented consideration of most other major initiatives in that chamber. The House had initially mulled sending to the Senate an omnibus bill that combined an extenders package and a temporary estate tax fix with must-pass defense appropriations legislation. However, realizing the time constraints in the Senate, the House backed off at the last moment and instead sent over a stand-alone government funding bill. The omission of extenders and estate tax pushes consideration of these issues into 2010. Estate tax: what happens now? The first tax item on the docket when Congress returns from its holiday recess in January will likely be crafting a bill to reinstate the estate tax and the generation-skipping transfer tax, which is now expected to expire at the end of 2009, as scheduled under current law. Lawmakers have anticipated the expiration of the estate tax for years, but have failed to address it because of disagreements over how the estate tax should be permanently reformed and, more recently, because of the sheer volume of floor time devoted to the health care debate. The House approved legislation on December 3 that would make permanent a top rate of 45% and exemption amounts of $7 million for couples and $3.5 million for individuals (the levels in effect for 2009), but with no adjustment for inflation. It also would repeal carryover basis rules. Lawmakers in the Senate backed a similar but more expensive proposal that would index the exemption amounts for inflation. Further, a bipartisan group of senators, led by taxwriters Blanche L. Lincoln, D-Ark., and Jon Kyl, R-Ariz., tried to build support for a more generous bill that would impose a 35 percent rate and $5 million exemption threshold. Lawmakers also considered, but were unable to agree on, extensions of current law ranging from several months to two years. Impact of expiration – Without any further intervention by Congress before the end of the year, the estate tax and the generation-skipping transfer tax will be repealed for 2010 and reinstated in 2011 with a top estate tax rate of 55 percent and an estate tax exemption of $1 million per individual (the structure in effect before the enactment of the Bush tax cuts in 2001). The gift tax regime will continue for 2010, with a lifetime gift tax exemption of $1 million, and a flat tax rate of 35 percent on taxable gifts. The step-up basis regime for inherited assets will also be repealed for 2010. In its place, carryover basis rules will generally apply for one year, requiring a beneficiary who inherits an asset to use the same basis as reported by the decedent. However, the 2010 tax law will still allow some transfers to qualify for a step-up in basis to fair market value. An estate can increase the basis of assets transferred to one or more beneficiaries by a total of $1.3 million. The amount of unused capital losses, net operating losses, and certain "built-in" losses of the decedent may also increase the $1.3 million cap. An estate can increase the basis of assets transferred to a surviving spouse by an additional $3 million. As a result, the step-up in basis for surviving spouses can total $4.3 million or even more if losses increase the step-up. In addition to qualifying for a basis step-up at the first spouse's death, property left outright to a surviving spouse will also qualify for the $1.3 million basis step-up provision in the surviving spouse's estate. However, property left to the surviving spouse in a marital deduction trust (either a general power of appointment trust or a qualified terminable interest property trust) would not be eligible for the step-up at the surviving spouse's death. Basis of any property to the heirs cannot exceed the fair market value of that property at the decedent's date of death, which under certain circumstances could result in a step-down in basis rather than a step-up. | |||||||||||||||||||||||||||||||||||||||
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