Estate and Elder Law

New Federal Tax Legislation Impacting Florida Estate Planning

The months 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 planning techniques.

ENACTED LEGISLATION

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%. 

Medicare Tax.  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.

The "Health 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).

Estate Taxes.  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 IRS.

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 threshold. 

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.

PENDING LEGISLATION

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