Wisconsin Estate Planning and Tax Law Blog

Federal Estate Tax in 2010

I intentionally waited until after President Obama's State of the Union Address to post my commentary of current state of the federal estate tax because a part of me was hoping that either Congress or the President would have clarified the situation by now.  Unfortunately for me, my fellow estate planning attorneys, and everyone affected or potentially affected by the estate tax, things are no clearer today than they were on January 1, 2010. 

The reality is this:  At the present time there is no federal estate tax for deaths occurring between January 1, 2010 and December 31, 2010.  This estate tax "repeal" is part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") (also affectionately/unofficially known as the "Bush Tax Cuts."  As I have discussed previously on this blog the EGTRAA is set to sunset (i.e. expire) on January 1, 2011, roughly 10 years after the it was signed into law.  I will not go into exhaustive detail as to why the sunset provision was included in the bill, but I will say that it was added to the bill as an end run around the Byrd Rule (a Senate rule), which allows Senators to block a piece of legislation if it purports to significantly increase the federal deficit beyond a ten-year term. 

On the surface the fact that we have reached 2010 with EGTRRA still in full-force seems like a good thing for individuals with large estates.  In fact it may well play out to be a good thing depending on Congress's actions this year.  However, therein lies the problem for a couple of reasons.  One, since Congress has not acted we are in an unenviable position of not having anything resembling clarity in regards to the current, let alone, the future federal estate tax system.  Given this uncertainty, it is extremely difficult to advise clients on matters related to the estate tax so it is difficult to be proactive in the estate planning realm at the moment.  Second, there is a thought shared by many commentators that Congress may look to make any changes to the federal estate tax system retroactive to January 1, 2010.  This makes it difficult to properly administer estates for individuals that die after January 1, 2010 and the date the any new estate tax law is passed.  Therefore, even reactionary planning and tax compliance are complicated by the uncertainty in the estate tax arena.

It does not give me great joy to deliver this state of the federal estate tax system to this blog's readers or to my clients.  Unfortunately, it is the reality we find ourselves in for the foreseeable future.  We simply do not know when or if Congress will revisit the federal estate tax issue this year.  In the event that they do not act the entirety of EGTRRA will expire, which will mean the pre-2001 federal estate tax system will return in full force.  That means the estate tax exemption returns to $1 million per person, the estate tax rate will be 55%, step-up basis returns after a one year hiatus, and the federal estate tax credit for state death taxes paid returns.  The return of that last item will in turn reignite numerous state estate tax systems that have been dormant since the federal estate tax credit of state death taxes was transitioned to a deduction.  Wisconsin is on such "pick-up" estate tax states that will go from having no estate tax on December 31, 2010 to having an estate tax on January 1, 2011.

I will do my best to monitor the situation and I will pass on any commentary or thoughts that I come across on the federal estate tax matter as we move forward.  We have less than 11 months remaining in 2010 so presumably the window of opportunity is closing quickly.  However, Washington had almost 9 years to plan for this and yet here we are, so I would not recommend holding one's breath. 

   

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Biography

Nathan Dosch is a tax, estate planning and business attorney at Neider & Boucher, S.C. in Madison, Wisconsin.  His writings here reflect his own opinions and not that the firm. 

Nathan focuses on assisting individuals and businesses with tax planning and business law issues.  He also works to design and implement estate and succession plans for individuals and business owners.  His main objective is to ensure that the client's wishes are carried out, while minimizing administration costs and taxes.

Nathan was born and raised in Devils Lake, North Dakota.  He attended North Dakota State University (NDSU) and earned a Bachelor's of Science in Business Administration.  While at NDSU he played on the varsity golf team.   He then attended Marquette University Law School where he earned his Juris Doctor degree.  Between his first and second year of law school he studied international and comparative law abroad at the University College in Dublin, Ireland.  While working as a practicing attorney he earned a Master's of Science in Taxation degree from the University of Wisconsin-Milwaukee.

Nathan regularly presents to different groups including financial professionals, attorneys, accountants and the general public on the topics of taxes, estate planning, probate and trust administration.  He also is a frequent author on taxes and estate planning on his blog, Wisconsin Estate Planning and Tax Law Blog, and in various print and on-line publications.

He is a member of the American Bar Association, the State Bar of Wisconsin, the Dane County Bar Association, the Outagamie County Bar Association, the Fox Valley Young Lawyers Association, the Fox Valley Estate Planning Council, Madison Estate Council and the Madison Area Growth Network (MAGNET).

Two New Estate Tax Bills Introduced

The week before Thanksgiving 2009 was a busy one for some legislators with an eye on our country's estate tax system.  Through November 20, 2009 the tally of estate tax related bills has reached 20, including the two newest bills discussed below.  The eleventh month does not translate into the eleventh hour, but we are quickly approaching what we would naturally think is the last possible time to act since the estate tax as we know it is set to change dramatically on January 1, 2010.  I do not believe that the December 31, 2009 "deadline" is as much of a call to action as I once did.  In fact, it would not surprise me to see little or no action by Congress prior to the end of 2009.  If that is the case, I would not be surprised to see Congress address the estate tax issue with retroactive legislation.  I have hoped for years that our lawmakers would take a more proactive approach, but I have grown less and less confident as each month and year has passed.

With that, let's turn our attention to the latest round of entrants (bills) in the estate tax lottery.  The first bill, S. 2784, A bill to amend the Internal Revenue Code of 1986 to permanently extend the estate tax as in effect in 2009, and for other purposes, was introduced on November 17, 2009 by Sen. Thomas R. Carper (D-DE) and Sen. George V. Voinovich (R-OH).  The highlights are as follows:

• Making the $3.5 million estate tax exemption permanent and indexing it for inflation starting in 2011;
• Tax rate of 45%;
• Unification of the gift and estate tax exemptions; and
• Portability of the exemption between spouses.

Late last week Rep. Earl Pomeroy (D-ND) introduced his second estate tax related bill this year.  The most recent, H.R. 4154, Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, was introduced on November 19, 2009.  Rep. Pomeroy's earlier bill, H.R. 436, Certain Estate Tax Relief Act of 2009, was introduced in January and has received a fair amount of attention, mostly attributable to the restrictions it places on valuation discounts.  The highlights of H.R. 4154 are as follows:

• Repeal of EGTRRA (a/k/a the 2001 Bush tax cuts)
• Making the $3.5 million estate tax exemption permanent;
• Freezing gift tax and estate tax rates at 45%
• Repeal of carryover basis rules

This is admittedly a very brief summary of the two estate tax related bills.  As always there is much more than meets the eye with new legislation.  What I take from last week's activity is that at least a few lawmakers have this issue on their radar as we near the end of November.  With the amount of time and attention that the health care bill is garnering it would be a major surprise to see any substantive movement on any estate tax bill for the foreseeable future. 

Widespread Fraud and Abuse of First Time Home Buyer Tax Credit

This item can probably best be filed under the category, "News We Expected."  As reported by the Wall Street Journal online in "Tax Credit Abuse and the Four-Year-Old Home Buyer" the Inspector General for Tax Administration, Russell George, testified before Congress today in regards to fraud and potential abuse of the home buyer tax credit.  Mr. George testimony comes at a time when the current home buyer tax credit is set to expire in less than 6 six at the end of November and with the real estate lobby pushing for an extension.

It would be fairly naive in my opinion to not anticipate that some individuals would commit tax fraud or intentional abuse the system.  I am certainly not condoning the illegal activity better known as tax fraud or tax evasion.  Reading articles highlighting fraud and abuse such as this reinforces in my mind the truism, "One bad apple spoils the barrel," except that a number of the apples in this barrel are bad, which will only hasten the spoilage of the first time home buyer tax credit.

U.S. News and World Report also published an online article titled "First-Time Home Buyer Tax Credit: All Sorts of Sketchy Claims" that discusses the fraud and abuse news as well as five things to know about the development.

The Other Shoe Has Dropped on Executive Pay

The Obama Administration pay czar, Kenneth Feinberg, has made it known that he will require each of the seven largest bailout recipients to reduce the total compensation for their top 25 highest paid employees by 50%, on average.   These rules affect the likes of AIG, Citigroup, and Bank of America. The New York Times article, "Curbing Wall Street Pay, and the Corporate Boards that Set it," provides additonal overview and commentary on the topic.

It will be interesting to see how this news is received in the various circles.  Wall Street will certainly exhibit a reaction.  Politicians will spin it in a way most favorable to them and their platform.  Individuals?  Well, I am not sure how we the people will respond.  I see two main reactions.  The first is that this is exactly what the government needed to do to keep the greedy business executives in line.  The second is that this is a classic case of government overstepping its boundaries in a free, capitalist economy.  Which one is right?  Probably neither, but we live in a polarized world where the "happy medium" is not an option.   

Cost of Government Day - 2009

For that last couple of years I have kept an eye out for the Cost of Government Day as calculated by the Americans for Tax Reform Foundation and the Center for Fiscal Accountability.  The Cost of Government Day 2009 Report is now available.  Today, August 12, 2009, is this years Cost of Government Day.  This is 26 days later than 2008.

I am sharing this report and link because it is an interesting look at the current tax and government landscape in the U.S.  The overall views expressed in the report of on the websites above are those of the Americans for Tax Reform Foundation and the Center for Fiscal Accountability and are not necessarily my views or the firm's view.  

Happy 4th of July

As we celebrate the 233rd birthday of our great country I thought it would be an appropriate time to take a quick look at the history of income taxes in the U.S.  The U.S. Treasury website has a page titled:  Fact Sheet: Taxes - History of the U.S. Tax System - that you might find interesting. 

It is hard for me to imagine things without taxes being part of the equation, but as you can see the U.S. income tax system didn't exist with any permanency until the 16th amendment was ratified by the requisite number of states in 1913.  With this version of income taxes being 96 years old there are still people living that might be able to imagine a world without them.  We've come a long way since the days when rates ranged from 1 to 7 percent.

With that it is now time to celebrate the 233rd anniversary of America's independence.  Have a fun and safe holiday weekend. 

Wisconsin State Budget 2009-10

The Legislature passed it, the Governor exercised a number of vetoes, and then Governor Doyle signed the state budget on June 30, 2009.  It was the first time the budget has been done on time since 1977.  I hate to date myself, but that is just slightly longer than I have been on this planet.  I previously discussed three of the tax related items in Doyle's proposed budget.  Those three items made the final budget.  In fact, the capital gains tax exclusion dipped to 30% from the originally proposed 40%.   

As a cynic would expect it did not end with the Governor's pen dashing across the paper.  Apparently Doyle "inadvertently" used a "Frankenstein Veto" on one item in the budget bill.  Up until last budgetary cycle that was not a problem, but the voters in Wisconsin amended the state constitution last year to make the "Frankenstein Veto" unconstitutional.  In any event, Wisconsin has a budget so I thought I'd take a quick look at the tax aspects of it:

• Change from a 60% exclusion to a 30% exclusion for capital gains taxes (100% exclusion for investments in certain Wisconsin start-up companies)
• Cut $1 million off the tax credit for movie production in Wisconsin
• $0.75 increase to the State's cigarette tax
• $0.75 per line cell phone tax
• Expansion of enterprise zone tax credits
• High Earner Tax Bracket (additional 1% tax rate on individual income in excess of $300,000 for joint filers and $225,000 for individual filers)

That is very brief overview of a handful of tax related items in a massive budget bill.  I will provide a link to the actual text of the budget bill as soon as one is available.

IRS Letters and Notices

As the 2008 tax seasons comes and goes I thought it would be prudent to provide a link to the IRS website that describes various correspondence from the IRS that some clients have received in the past or may receive in the future.  The IRS website provides a page titled Letters and Notices Offering an Appeal, which contains short descriptions of various IRS examination or collections letters.  The five letters/notices that I typically see from new clients are the following:

• Letter 525 – General 30 Day Letter
• Letter 531 – Notice of Deficiency
• Letter 11 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing
• Letter 1058 – Final Notice Reply Within 30 Days
• Letter 3172 – Notice of Federal Tax Lien Filing and Your Rights to a Hearing under IRC 6320

One of, if not the most important aspect of these letters is the deadline by which the recipient has to respond.  In most cases the recipient has to respond within 30 days from the date of the letter.  In the case of Letter 531 - Notice of Deficiency, the taxpayer has 90 days to petition the tax court.  If the taxpayer does not file the petition with the tax court within 90 days, the tax court no longer has jurisdiction and cannot hear the case.  This is extremely important since the tax court is the only forum (the other two options are the U.S. District Court for the taxpayer's jurisdiction or the U.S. Court of Federal Claims) that does not require the taxpayer to first pay the alleged tax liability before seeking a refund through the Federal District Court or the Court of Federal Claims.

Therefore, the main purpose of this post is very straightforward:  Read the IRS letters and notices and strictly adhere to the deadlines contained therein.  As always, please consult a qualified tax attorney or CPA to assist you with tax issues of this kind.

Wall Street Executive Bonuses: The Firestorm Rages On

I have not had the opportunity to fully research and review all of the material involved with the executive bonuses saga that has engulfed all of us in recent weeks, but I wanted to provide some brief commentary on the topic.  It is relevant to this blog because the most popular ideas currently discussed by the government involve the enactment of an excise tax on executive bonuses received after January 1, 2009.  In fact a Bill was introduced by the Rep. Charles B. Rengel (D-NY) today.  The legislation is referred to as H.R. 1586 and the full text can be found at the House Ways and Means Committee website in pdf here.  The Taxgirl has a great discussion of this bill in her post, Legislation Introduced to Tax Bonuses at 90%.

According to Reuters.com, House votes to recoup bonuses from bailed-out firms, the House overwhelming passed the Bill by a 328-93 split.  An article, House Opens Debate on Bill to Tax Wall Street Bonuses, by Martin Vaughan on CNNMoney.com , discusses some of the partisan debate on the topic including the argument from some Republicans that the Bill is unconstitutional and that more effective alternatives are available.  This article by David Stout on NYTimes.com, House Passes Heavy Tax on Bonuses for Rescued Firms, also provided a nice overview of today's events and the debates that will no doubt linger for at least a bit longer.

As I read through the New York Times article I was struck by a number of things but nothing drew my attention quick as much as the comments made by Rep. Earl Pomeroy (D-ND).  Rep. Pomeroy was as saying, “The people have said ‘no.'  In fact, they said ‘hell no, and give us our money back.’”  I am not intending to take sides in today's great debate, but I am intrigued by Pomeroy's comments for three reasons.  First, I was born and raised in North Dakota so I always get a kick out of seeing the state's long Representative in the news.  Second, until recently I have heard virtually nothing about or from Pomeroy.  Now I see his name in regards to the Wall Street Bonuses topic and he has one of the most popular proposals regarding Federal Estate Tax in H.R. 436: Certain Estate Tax Relief Act of 2009.  Third, I'm completely convinced that Pomeroy's "hell no" clearly eliminates any ambiguity as to his true feelings on the matter.  That direct, no-nonsense delivery is what I attribute to the stereotypical North Dakotan.

One other quote that I thought was noteworthy is from the Bill's sponsor Rep. Rangel.  According to FoxNews.com, Rangel said, "We figured that the local and state governments would take care of the other 10 percent."  So let there be no confusion as to the government's intentions.  While the bonus recipients may face a 90% tax at the Federal level they should also expect the states to gobble up the remaining 10%.  That's one way to recoup the TARP money I guess.