Tag Archives: Estate tax

Fiscal Cliff deal: The good, bad, and ugly

Last night, Jan. 1, 2013, at 10:45 pm, the U.S. House of Representatives approved a deal to avert the fiscal cliff, by a final vote of 257 to 167.

The House vote came less than 24 hours after the Senate had overwhelmingly approved the bill 89 to 8, with both parties’ support. The bill now goes to the POS for his signature. Instead of signing the bill, he’s already left D.C. to resume his vacation in Honolulu which was so rudely interrupted by the fiscal cliff negotiations. [snark]

The Fiscal Cliff deal:

  • The top tax rate increases from 35% to 40% on annual income over $450,000 for married couples and $400,000 for single people. This is the first time in more than two decades that a broad tax increase has been approved with GOP support.
  • “Temporary” Bush tax cuts for couples making less than $450,000 and individuals making less than $400,000 per year are made “permanent” (which means “until Congress changes their mind”).
  • More than 100 million “middle class” families (those earning less than $250,000 a year) will be protected from significant income tax increases set to take effect this month, but their payroll taxes will rise with the expiration of a temporary tax cut adopted two years ago.
  • No estate taxes on inheritance of $5 million, or $10 million for married couples.
  • Federal dairy policies will be extended through September, averting a threatened doubling of milk prices.
  • Extension of unemployment benefits to 2 million people for another year.
  • Automatic cuts to the Pentagon and other agencies that had been set to take effect today will be delayed for two months.
  • Pay raise for members of Congress, which was effectuated by Obama’s executive order, is nixed.
  • Automatic spending cuts (sequestration) from last year’s debt ceiling deal are postponed until March 2013, which means — oh joy — there’ll be a Fiscal Cliff II next month!

The Bad:

Buried in the fine print of the 150-page deal are some New Year’s gifts to some of Washington’s favorite cronies. Under the plan, the federal government would eat nearly $100 billion in forgone tax revenue over the next two years by extending special tax credits for select businesses that had been set to expire:

  • $430 million for Hollywood through “special expensing rules” to encourage TV and film production in the United States. Producers can “expense” up to $15 million of costs for their projects. All this for a film industry that enjoyed a record box office last year.
  • $331 million for railroads by allowing short-line and regional operators to claim a tax credit up to 50% of the cost to maintain tracks that they own or lease.
  • $222 million for Puerto Rico and the Virgin Islands through returned excise taxes collected by the federal government on rum produced in the islands and imported to the mainland.
  • $70 million for NASCAR by extending a “7-year cost recovery period for certain motorsports racing track facilities.”
  • $59 million for algae growers through tax credits to encourage production of “cellulosic biofuel” at up to $1.01 per gallon.
  • $4 million for electric motorcycle makers by expanding an existing green-energy tax credit for buyers of plug-in vehicles to include electric motorbikes.

The Absurd:

  • This is how farcical the fiscal cliff brouhaha was: Members of the U.S. Senate had only 3 minutes to read the 154-page fiscal cliff bill and budget score, before they voted 89-8 to approve the bill. Senators received the bill at approximately 1:36 AM on Jan. 1, 2013 – a mere three minutes before they voted to approve it at 1:39 AM. I’ve taken longer to read the instructions for my new cell phone.
  • House Republicans also violated their pledge to allow three days for the public to read the legislation before they would vote on a bill. This was a promise the GOP made to voters before the 2010 elections.

The Ugly:

151 Republicans in the House voted “no,” which meant the GOP tally fell far short of a majority of the GOP caucus. That broke a long-standing preference by House Speaker John Boehner to advance only bills that could draw the support of a majority of his Republican members. So Boehner himself cast a rare vote: He supported the bill. So did Rep. Paul Ryan (Wis.), the GOP’s vice-presidential candidate last year.

40 House Republicans voted for the bill, including such GOP leaders on tax-and-spending policy as Sen. Patrick J. Toomey (Pa.) and Ronald H. Johnson (Wis.), a tea party star.

The Good:

  • Senate Republicans who voted against the bill include tea party favorites Rand Paul (Ky.) and Mike Lee (Utah), as well as Marco Rubio (Fla).
  • House Republicans who voted no include Majority Leader Eric Cantor (Va.) and Majority Whip Kevin McCarthy (Calif.).

The Really Bad:

Regardless of one’s political affiliation or beliefs, from an economic and fiscal perspective, the cliff deal has accomplished nothing. Here’s why:

  • The bill’s proposed spending cuts of $15 billion are less than 2% of the federal government’s deficit.
  • The bill’s tax increases will raise $620 billion over the next ten years — roughly $62 billion in new tax revenue per year.
  • $62 billion in new tax revenue per year is less than 6% of the $1+ trillion deficit the Obama regime has incurred every year for the past four years.
  • According to the nonpartisan Congressional Budget Office, the fiscal cliff bill will cause the national debt to be $4 trillion higher by 2022 than if all of the cliff’s tax increases and spending cuts had been allowed to take effect.

Sources: CNN, Washington Post, ABC News, CNS News.

~Eowyn

3 Biggest Tax Stories of 2011

Bill Bischoff, “the tax guy,” writes in Smart Money, Dec. 21, 2011, that ” there was only limited tax news this year, and we will probably not see any really big developments until after the 2012 election.” That being said, “there were two significant developments and one significant non-development” in terms of taxes in 2011. They are:

1. No Grand Tax Compromise:

When push came to shove, the Democrats and Republicans couldn’t even agree on where to go to lunch, much less on big changes in tax policy. So the deficit reduction problem was punted to a “super committee” which then failed to reach a consensus. As a result, automatic spending cuts are supposed to kick in to the tune of about $1.2 trillion (a number that looks increasingly inadequate) over 10 years. There are no automatic tax increases in the super committee deal, and none may be needed — because the so-called Bush tax cuts are scheduled to expire (again) at the end of 2012. If that is allowed to happen, massive tax increases will take effect in 2013.

2. Temporary Social Security Tax Cut:

For 2011 only, the withholding rate for the employee’s share of the Social Security tax was reduced from the usual 6.2% to only 4.2%. For self-employed individuals, the Social Security tax component of the self-employment tax was also reduced from the usual 12.4% to 10.4%. For 2011, the Social Security tax hit the first $106,800 of wages or self-employment income, so the maximum savings from the cut was $2,136 (2% x $106,800). A married couple can save as much as $4,272 (2% x $2,136). Anyone with wages and/or self-employment income benefits to some degree from this arrangement.

For 2012, there’s still a good chance the Social Security tax reduction will be extended and maybe even increased to 3%. But there will apparently be a lot of political gamesmanship before that happens. (For 2012, the Social Security tax will hit the first $110,100 of wages and/or self-employment income.)

3. New Estate and Gift Tax Regime Takes Effect:

  • For estates of individuals who died in 2011 or made gifts in 2011, there’s a $5 million unified federal estate and gift tax exemption.
  • For estates of individuals who die in 2012 or make gifts in 2012, there will be a $5.12 million unified exemption.
  • The estate and gift tax rates are both a flat 35%.
  • Married individuals who die in 2011 or 2012 can pass along their unused federal estate and gift tax exemptions to their surviving spouses.
  • Heirs of decedents who die in 2011 and beyond, won’t owe any federal capital gains taxes on appreciation that occurs through the date of death — as long as that date is in 2011 or later.
  • All but one of these beneficial changes will expire at the end of 2012 unless Congress takes further action. The unified gift and estate tax exemption will fall back to a paltry $1 million, the maximum estate and tax rate will go up to a punitive 55%, and the portable exemption deal will die. The only taxpayer-friendly provision that will survive is the basis step-up rule for inherited capital gain assets (it’s permanent, until Congress changes its mind).

~Eowyn

 

Worst States For the Rich to Die

Benjamin Franklin, in his letter to Jean-Baptiste Leroy (13 November 1789), wrote: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” Little did Franklin know or even imagine that the government he fought for and helped establish would, in an ingeniously perverse stroke, combine both death and taxes in the DEATH TAX.

For the one who’s dying, there is no good state in which to die; but some states are better than others for the surviving inheritors.

~Eowyn

Estate Taxes: The Worst Places to Die

By Bill Bischoff – Smart Money – Feb 21, 2011

With the new $5 million federal estate tax exemption for 2011 and 2012, most folks are blissfully free of any federal estate tax worries (for now). That’s the good news. The bad news: Twenty states and the District of Columbia impose estate or inheritance taxes that kick in below the $5 million mark, and some kick in below $1 million. If you live in one of these places, your estate can be exempt from the federal death tax but still exposed to state death taxes.

Hawaii and North Carolina have $5 million exemptions, but estates worth over that amount will be hit with both the federal estate tax and the state version.

Here’s the story on the worst places to die from an estate tax perspective.

16 States and DC Have Estate Taxes

The sixteen states and the District of Columbia, which impose their own estate taxes (as opposed to inheritance taxes, which I will explain later) base their taxes on the entire value of an estate in excess of the applicable exemption.

The exemptions vary from a low of $338,333 to a high of $5 million. Specifically:

• Three states have exemptions of less than $1 million (Ohio at $338,333; New Jersey at $675,000; and Rhode Island at $850,000).

• Six states have $1 million exemptions (Maine, Maryland, Massachusetts, Minnesota, New York, and Oregon), and so does D.C.

• Three states have $2 million exemptions (Illinois, Vermont, and Washington)

• Two states have $3.5 million exemptions (Connecticut and Delaware).

• Two states have $5 million exemptions (Hawaii and North Carolina).

The lowest tax rates are 7% (Ohio) and 12% (Connecticut). The highest is 19% (Washington). The other 13 states and D.C. all charge 16%.

6 States Have Inheritance Taxes

Six states impose only inheritance taxes, which are assessed on the value of specific inherited assets in excess of the applicable exemption (estate tax is assessed on the entire value of an estate in excess of the applicable exemption).

The inheritance tax exemptions are zero or negligible — except in Tennessee which has a $1 million exemption.

The tax rates are 9.5% in Tennessee, 15% in Iowa and Pennsylvania, 16% in Kentucky, 18% in Nebraska, and 20% in Indiana.

Worst Case: 2 States Have Both

Maryland and New Jersey raise confiscation to a higher level by charging both an estate tax and an inheritance tax. In Maryland, the inheritance tax exemption is a whopping $150 and the tax rate is 10% (in addition to the 16% estate tax rate). In New Jersey, the inheritance tax exemption is zero and the tax rate is 16% (in addition to the 16% estate tax rate).

The Other 28 States Have No Estate or Inheritance Taxes

The 28 states NOT listed above have no estate or inheritance taxes. They are better places to die.

How the Taxes Add Up

Thankfully, the federal and state tax rates are not just stacked on top of each other.

• If you live in Maryland or New Jersey, the state inheritance tax is subtracted from the value of the estate before calculating the state estate tax.

• State inheritance and estate taxes are subtracted from the value of the estate in calculating the federal estate tax.

Despite these subtractions, you can wind up with some pretty horrific effective combined tax rates when you account for federal and state estate taxes and inheritance taxes. The effective combined rates range from a low of 39.6% in Ohio to a high of 54.1% in New Jersey. These are the maximum rates that would apply to estates worth over $5 million. For instance, if you die in New Jersey with a $15 million estate, the combined federal and state tax hit on the $10 million excess over the federal exemption would be $5,410,000. Ouch!

The Bottom Line

The worst place to die is New Jersey with a combined effective estate and inheritance tax rate of 54.1%. Congrats to the Garden State! In second place is Maryland at 50.9%. Good try! In fact, none of the states mentioned here are good places to die, but some are significantly worse than others. Most of the states listed here are not good places to live either from a tax perspective because they sock it to you with income, property, and sales taxes while you’re still kicking.

Taxes are a big part of the reason why New York and New Jersey are losing population, while low-tax states like Florida and Texas are gaining. People will vote with their feet when all else fails. Just don’t wait too long to vote!