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Client Connection
Major income tax and estate tax changes on the way!
Recently the United States Senate passed its reconciliation bill to the House-approved Bush tax relief plan on a vote of 62-38. Montana's own Senator Baucus was very instrumental in the passage of this legislation. The bill eventually eliminates the Death Tax (for one year) and reduces marginal tax rates.
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Income tax Changes
Some of the provisions take place immediately while others take place several years from now. One of the first changes people may note is a small increase in take home pay as withholding tables are revised mid-year. Another immediate effect will be a refund credit effective July 1, 2001. The Amount will be $300 single, $600 married filing joint, $500 head of household. So sudden is the impact of this bill that the government is still trying to figure the logistics of getting refund checks out to Americans. The income tax rates are also scheduled to fall on both regular and capital gain income. Further info about capital gains.
Many provisions of the bill are back-loaded (taking place in later years). Two back-door tax hikes that have plagued upper-incomes in recent years- The phase-out of personal exemptions would end, but not until 2009 and the itemized deduction phase-out would rise to $245,000 by 2009.
Under provisions of this bill ,marriage penalty relief is finally on its way, but not until 2005. The marriage penalty is the fact that in most cases two people filing as single people would pay less tax than if they filed as a married couple. Marriage penalty relief, when it arrives will take two forms. It will include providing joint filers with a standard deduction that is twice the amount of standard deduction provided to single filers, phased in over a four year period starting in 2005 and ending in 2008. It will also expand the high-end of the income level falling under the 15 percent tax rate bracket to an amount equal to twice that of single taxpayers over a 2006-2008 period.
Many education related deductions and child credits will be expanded or added to the tax law. The main new provision in this area is that the new law provides for a college tuition deduction of up to $3,000 for people who make under 65,000 singe 130K married. Education savings accounts and enhanced student loan deductions are also part of the bill. The child tax credit would increase $100 this year to $600 and additional increase of $100 would take place in 04, 07, 10, 11.
IRA contributions limits will gradually rise on both traditional and Roth IRA's from the current $2,000 cap to $5,000 (3,000 for 2002-2004; $4,000 for 2005-2007: and $5,000 for 2008 and thereafter) 401(k) contribution limits will rise from $10,500 to 15,000 by 2006.
Estate tax changes:
Changes in this area may be nothing more than a budgetary slide-of-hand. While the rates are reduced starting in 2002 and the exemption is increased cumulating in the elimination of the estate tax in 2010 for only one year! Due to budgetary restrictions, the new law allows the current estate tax rules, rates and exemptions to come back in force in 2011. This actually increases the uncertainty and complexity of estate taxes because Congress has to face the entire issue again under perhaps entirely different political circumstances.
Never-the-less, changes in this area should be welcome relief to many Montana businesses and family farmers who face the threat of selling the family business to pay this tax or taking out large insurance policies that drain cash.
The trade-off in step-up in basis- For the year the estate tax is repealed (2010) a modified carryover basis rule immediately goes into effect. The basis of assets received from a decedent will carry over from the decedent rather than be stepped up to fair market value at date of death. Further, to prevent significant use of gifts to transfer income-laden property from higher to lower rate taxpayers, the new law retains a modified gift tax. Starting in 2010, gifts in excess of a lifetime $1 million exemption would be subject to a gift tax equal to the top individual income tax rate at that time.
The above summary is a brief preliminary outline of the tax code changes, important tax decisions should always be made with the individual consultation of your tax advisors who can take in account all the facts and circumstances that may affect you.
Ross A. Norman, C.P.A.
Ross Norman is a partner at Hamilton Misfeldt & Company, CPA's in Great Falls, Montana. Ross grew up on a ranch in Bozeman and has experience in land, property, and other ranch transactions.