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of March and April 2010 have brought new tax legislation that increases Federal
taxes on both high and lower income taxpayers.
The following is a brief overview of the new tax provisions and
potential future legislation which would adversely impact current estate
Income Tax. Unless Congress takes action on
income taxes before December 31, 2010, the tax reductions enacted in 2001 and
2003 will expire and the long term capital gains tax rate will rise from 15% to
20%. The maximum income rate on ordinary
income will rise from 35% to 39.6%.
The "Patient Protection and Affordable Care Act," signed into law on
March 23, 2010, increases the Medicare tax imposed on an individual's wages or
earned income. Beginning in 2013, the law increases the Medicare tax from 1.45%
to 2.35% on wages or earned income in excess of $250,000 for married taxpayers
or $200,000 for single taxpayers.
Care and Education Affordability Reconciliation Act of 2010," signed into law
on March 30, 2010, imposes a new 3.8% Medicare tax on investment income
(interest, dividends, royalties, rents, annuities and capital gains). Beginning in 2013, the law will impact
married taxpayers with modified adjusted gross income in excess of $250,000 and
single taxpayers with modified adjusted gross income in excess of $200,000.
As a result
of both laws, dividends could be taxed at a federal rate as high as 43.4%
(39.6% + 3.8%) and long term capital gains at 23.8% (20.0% + 3.8%) before you
consider state income taxes. Thankfully, the taxes will not apply to income not
subject to regular income tax (interest on state and municipal bonds or the
portion of gain from the sale of your residence that is not subject to tax).
If Congress fails to act on or before December 31, 2010, the estate and
gift tax rates will return to 55% with the exemption limited to $1,000,000.
While during 2010 there is no estate tax, there is also only a limited increase
permitted to the income tax basis of the decedent's assets. Through December
31, 2010, the maximum Federal gift tax rate will remain at 35%.
Payroll Taxes. The "Hiring Incentives to Restore
Employment Act," signed into law on March 18, 2010, creates special incentives
to hire unemployed workers after February 3, 2010. Under the law, an employer who hires a
workers who has been unemployed for at least 60 days will not have to pay the
employer's Social Security payroll tax (6.2% on the first $106,800 of wages)
for the balance of 2010. The tax break
is not applicable to the hiring of a family member or the firing of current
worker and replacing them with a previously unemployed worker. If the worker remains employed for more than
fifty-two weeks, the employer will receive an additional non-refundable tax
credit of up to $1,000. The tax incentive only applies to wages paid after
March 18, 2010.
Foreign Financial Assets.
For tax years beginning after March 18, 2010, the "Hiring Incentives to
Restore Employment Act" imposes information reporting requirements on any U.S.
individual who holds interests valued in the aggregate at more than $50,000 in
(1) any depository or custodial account maintained by a non-U.S. financial
institution, (2) any stock or security issued by a non-U.S. person, (3) any
interest in a foreign entity, and (4) any financial instrument or contract with
a non-U.S. counterparty not held within a custodial account maintained by a
financial institution. A taxpayer's failure to report the assets, absent
reasonable cause, will be subject to a penalty of $10,000, and additional
penalties (up to $50,000) if the failure continues after being notified by the
Health Insurance Credits. The Health Care and Education
Reconciliation Act of 2010 also impacts health insurance premium credits by
being linked to the poverty line (no longer the taxpayer's income). The new law
offers refundable, advance premium credits to singles and families with incomes
between 133 and 400 percent of the federal poverty line. These credits can only
be used to buy health insurance through the new health exchanges. Based upon
the new poverty line standard, a single taxpayer could earn up to $43,000 and
remain eligible to purchase health insurance. However, a married couple each
earning $43,000 would exceed the $58,000 married couple poverty line
BENEFITS AND SUBSIDIES
Unemployment Benefits. The Continuing Extension Act of
2010, signed into law on April 15, 2010, extends both federal unemployment
benefits and the COBRA premium subsidy program. Unemployed taxpayers may now
file applications for Federal Emergency Unemployment Compensation (EUC) from
April 5, 2010 to June 2, 2010. The
result is an extension of the period, from September 4, 2010 to November 6,
2010, of the period taxpayers may claim and be paid EUC and qualify for the
Federal Additional Compensation (FAC).
COBRA Premium Subsidy. The Continuing Extension Act of
2010 also extends the eligibility period for the sixty-five percent (65%) COBRA
health insurance subsidy for qualifying individuals who have lost their job.
The result is transition relief for taxpayers who lost their jobs between March
31, 2010 and April 15, 2010.
Grantor Retained Annuity Trusts. Congress is contemplating imposing a
ten year minimum term for Grantor Retained Annuity Trusts ("GRAT"). The legislation is contained within "The
Small Business and Infrastructure Jobs Tax Act of 2010" (H.R. 4849). If
enacted, the legislation would also preclude future use of a "zeroed out" GRAT
and a declining annual payment to the creator of the GRAT during the first
ten-years of its term. A ten-year
minimum GRAT term would prevent any estate tax savings unless its creator
survived to the end of the term.
Marc Soss' practice focuses on
estate and tax planning; probate and trust administration and litigation;
guardianship law; and corporate law in Southwest Florida. Marc has published articles and been quoted
in the Florida Bar, Rhode Island Bar, Association of the United States Navy,
Lawyers USA, Bradenton Herald (Around the Ranch), Military.Com, Forbes.Com, and
CNN Business. Marc also serves as an officer in the United States Naval Reserve. He can
be reached at www.fl-estateplanning.com