Law Office Report - Summer 2010
Legislative Update
Attorney David M. James
We have seen a lot of new, significant legislation at the federal level in the past 18 months. Some of the most notable are the massive economic rescue efforts, major health care reform, and most recently, re-regulation of Wall Street with the most sweeping overhaul of our financial system since the Great Depression. With all this done, apparently still up for consideration are major revisions to the energy policy and immigration reform.
As we approach the end of summer and an ever-shrinking Congressional calendar, the focus of many is shifting to laws that were passed in 2001 and 2003. Why the renewed interest in old law when so much new law has been passed (and more is on the agenda)? Well, certain tax legislation that was enacted in 2001 and 2003 included a “sunset” date of December 31, 2010. That means that unless Congress acts, certain tax cuts that were enacted over the past ten years will expire at the end of this year. (Sunset provisions are used to fit legislation into long-term government budget protections.)
Here is a sampling of certain major income tax provisions affecting individuals that are set to expire at the end of the year. Important to many is that the individual tax rate structure will change by removing the 10% bracket so the lowest bracket is 15%. The top brackets will also revert back to 36% and 39.6% from current levels of 33% and 35%, respectively. The top capital gains tax rate is also set to increase from the current 15% to 20%. Dividends paid to individuals will no longer be eligible for capital gains rates and instead will be taxed as ordinary income.
Also of interest to individuals is the pending change to the estate tax. Under current law there is no federal estate tax for individuals dying in 2010 (a fact that receives more attention with the passing of every billionaire). In 2009 there was an exemption of $3.5 million, in addition to the unlimited marital deduction that allowed spouses to transfer property to the surviving spouse without tax. Unless Congress acts, on January 1, 2011 the estate tax will be reinstated at 2001 levels with an exemption of $1 million and a top rate of 55%.
What will Congress do? Well, probably not much before the November elections. President Obama’s bipartisan fiscal commission is not scheduled to report back until December 1, 2010. In addition, some original supporters of the 2001 and 2003 tax cuts (most recently former Federal Reserve Chairman Alan Greenspan) are claiming the federal deficits are too high to extend permanent tax breaks.
What does this all mean for clients and advisors? Well, we are looking at least a few more months of an uncertain tax planning environment. So for now, stay tuned, stay flexible and enjoy the rest of your summer!