“Lame Duck” Session is Anything But…

As 2010 came to a close, the professional advisor community felt continued uncertainty about the estate tax come back amidst year-long congressional inaction; however, after a brief battle and a valiant show of bi-partisanship in both the Senate and the House, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (a.k.a. Tax Relief Act of 2010) into law on December 17, 2010, just before the 111^th Congress came to a close. This multi-billion dollar tax cut package addressed several key economic issues, such as:

• extending unemployment insurance to those whose benefits had expired,
• maintaining the current income tax bracket structure and
• re-instating the estate and GST taxes repealed by EGTRRA’s (Economic Growth and Tax Relief Reconciliation Act of 2001) “sunset” provision at the end of December 2009.

Tax Relief Act’s Impact on Estate Planning

Here are just a few highlights from the law that impact estate planning:

• the federal estate tax has come back with individuals receiving an exemption of $5 million (and couples at $10 million) and a flat tax rate of 35% for any portion above the exempted amounts. An executor of a deceased spouse’s estate can transfer any unused exemption amount to the surviving spouse without complicated estate planning to claim the entire exemption.
• Estate and gift taxes are now reunified for gifts made after December 31, 2010. Long term capital gains and dividend income are subject to a top tax rate of 15% and the income tax brackets of 10%, 25%, 28%, 33% and 35% have been temporarily extended.
• Individuals who are over 70.5 years old must take required minimum distributions from their personal IRA plans and are able to make a tax-free distribution of up to $100,000, directly to a charity. This can be done annually, but the distribution must go directly from the IRA plan administrator to the charity in order for the distribution to be tax-free.
• The new law also allows individuals to make charitable transfers during January 2011 and have those transfers treated as if made in 2010.

Other components to the Tax Relief Act of 2010 include various tax credits for child, earned income, adoption and dependent care. Also included is a “patch” to the Alternative Minimum Tax; it is designed to keep middle income taxpayers away from the AMT by increasing the exemption amounts. Finally, many of us will notice more dollars in our paycheck thanks to the reduction in the amount employees pay of Social Security tax.

While “lame duck” might not be the most appropriate term for this year-end session, due to all of the remedies and benefits taxpayers have gained in the Act,  not to mention the leadership, compromise and commitment to work together that it took to get there, we might not want to pat Congress and the President on the back quite yet, since this legislation is set to expire on December 31, 2012!

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