The Republican “wave” in the November elections did not have the effect of melting the frozen state of negotiations over what to do about the “Bush tax cuts” that expire with 2010. Republicans claimed a popular mandate for no new taxes on anyone, while the Democrats doubled down on their strategy of increasing taxes for the top 2% of taxpayers.

A bipartisan meeting between President Obama and Congressional leaders, initially scheduled for November 18, was put off until November 30. Even if the meeting produces a compromise, having to get massive tax reform legislation through Congress in the days before Christmas would be daunting. Accordingly, one school of thought sees tax reform being delayed until 2011, when the Republicans take over the House. “Tax cuts” then could be restored retroactively.

However, there is still the matter of the extenders and the Alternative Minimum Tax for 2010. The AMT 2010 exemption hasn’t been patched for inflation yet. If nothing is done, the number of taxpayers subject to the AMT will soar. This problem is independent of the fate of the Bush tax cuts and would hit upper-middle class taxpayers in the blue states hardest.

And another “however”—the report of the deficit commission, calling for major tax reform, was issued after the election. The report calls for elimination of some or all of the “tax expenditures” in the tax code, including the deduction for home mortgage interest and the exclusion from income of employer-paid health insurance premiums. If the issue of the Bush tax cuts is deferred until next year, could the resolution become entangled with a response to the deficit commission? Would allowing all the tax cuts to expire make it easier to accept more of the commission’s recommendations?

The estate tax seems to be on the back burner for legislators. Accordingly, it will be prudent to expect the return of a federal estate tax, with top rates up to 60% and an exemption of only $1 million.

Family businesses, farmers make an estate tax push

In an October letter to Congress, the Family Business Estate Tax Coalition (FBETC) expressed its disappointment over the failure to resolve estate tax issues for 2011. The Coalition includes 54 organizations representing diverse sectors of the economy, such as the National Restaurant Association, the Newspaper Association of America, Printing Industries of American and the Wine Institute.

The goal of the coalition is elimination of the estate tax, a measure that would promote the financial stability and longevity of family-owned businesses. If repeal is not possible, the coalition favors a $5 million federal exemption coupled with a 35% tax rate, the Kyl/Lincoln proposal in the Senate.

Support for that measure came as well from the American Farm Bureau Federation in October. Their President, Bob Stallman, said, “For farmers and ranchers, passage of estate tax relief is the single most important tax issue left unresolved by Congress.” The organization also advocates inflation indexing for the exemption and making it transferable to a surviving spouse.

The uncertainty about future tax rates is perhaps the most troubling point. “Immediate estate tax relief is needed to ensure businesses can make sound economic decisions,” concluded the FBETC.

Estate filing requirements for 2010

The lack of a federal estate tax does not eliminate the need for tax filing for larger estates. Christopher Wagner, the commissioner of the IRS Small Business/Self-Employed Division, reminded the attendees at an October UCLA Tax Controversy Institute that information returns are required from all 2010 estates larger than $1.3 million. Those returns are necessary to enforce the carryover basis provisions that apply to such estates, assuming that there is no retroactive restoration of the estate tax and basis step-up.

Wagner also told the group about IRS efforts to implement the new excise tax on indoor tanning, as well as the renewed focus on high-net-worth individuals as audit candidates. His division also is attempting an outreach to help employers understand the new small business tax credit, designed to encourage them to offer health insurance.

Not all dying billionaires avoided estate taxes in 2010

Contrary to earlier press reports, the estate of Texas billionaire Dan Duncan did not avoid federal estate tax liabilities as a result of his death in 2010, according to a statement released by the firm he owned. Most of the economic value of the firm was transferred to his heirs years ago, and the bulk of Duncan’s probate estate will pass to charity. Those transfers avoid death taxes regardless of the year of death.

However, writing in The Wall Street Journal’s Wealth Report blog, Robert Franks points out that Duncan kept control of the company until his death. That control passed to others at that moment. Didn’t control have value, and if so, would it not have been taxable in any other year?

reprinted form Peoples United Bank Newsletter
© 2010 M.A. Co. All rights reserved.