Blogs Derek's Tax Blog Will We Get a Two Year Extention?
Something interesting happened today. The Senate passed a paygo or pay-as-you-go bill. The purpose of this legislation is to force some fiscal discipline on the legislative and executive branch. Although that sounds like a good idea, the legislation was only passed as part of a compromise to obtain support for the debt level increase from Senate Democrats and House Blue Dog Democrats. The Republicans are opposed to it, calling it "swiss-cheese-go" (Republican Judd Gregg) because of its exemptions.
It is the exemptions that I find interesting. They are different than the ones that were in the House version of paygo. Specifically the Senate is limiting the exemptions for the Medicare "doctor fix" to 5 years and the extensions of relief from the Alternative Minimum Tax and the estate tax to two years. (here)
A two year extension for the Estate Tax! That gets my attention. That means that if congress can finally get around to increasing the Federal Estate Tax Exemption for 2011 and beyond for the current $1 million exemption, they will only be able to do to make the exemption increase longer than 2 years if they are able to offset it with spending cuts or tax increases. Considering that congress has already had nine years to deal with this issue and has been unable to do it, any legislation we do see this year will likely only punt the estate tax issue 2 years into the future. Madness!
As a planner, how can I advise clients? Put blind faith in a future congress to address it or plan for the worst case scenario? Of course I have to do what I have been doing for the last 9 years. Advise clients to plan for a $1 million exemption. To do less would be to expose them to an unnecessary risk. My concern is that some clients will hold out hope for a larger exemption or repeal and will either not plan or will not plan enough causing their estates to pay more taxes than necessary at their death.
Taking a bigger picture look, this bill and President Obama's State of the Union address represent a negative shift for taxpayers on the issue of the estate tax. What was in the State of the Union that concerns me? Two things: 1) the President did not mention the estate tax, which means it’s now a low priority item for him, and 2) the President's deficit commission.
The commission is a particularly troubling sign. While the Republicans have consistently been calling for repeal of the estate tax or increasing the exemption to $5 million, the Democrats have only been in favor of a $3.5 million exemption since they got behind candidate Obama's position in 2008. President Obama doesn't want to break any campaign promises. As his State of the Union address shows, he is pushing forward with his agenda. Unlike candidate Obama, President Obama has to also deal with the deficit. Congress has been unwilling to take the lead.
So the President is shifting this hot potato to a commission that will not report its findings until after the mid-term elections. The commission’s recommendations will likely include tax increases and spending cuts. This means the congress will likely not address taxes or spending cuts for much of 2010. Increasing the likely hood that an estate tax bill will not be voted on until the end of the year, much like last year. The commission's report will also give President Obama political cover to back away from his campaign position on the estate tax and take the more traditional Democrat position.