Today marks the two year anniversary of the bill that extended the Bush tax provisions for two years and raised the Federal Estate Tax and Gift Tax Exemption to $5 million.
My how things have changed! Two years ago the Republicans in Congress were in control and they were able to preserve the favorable tax rates for all taxpayers. At that time the focus was on retaining the unemployment benefits and bolstering the economy.
Now President Obama has the upper hand and has recently obtained tax concessions and debt limit concessions from Speaker Boehner. The focus is on the Fiscal Cliff and raising tax rates on the upper income tax payers. Although progress appears to have been made on taxes, the offer from Boehner has been rejected by President Obama for not providing enough revenue. Further, President Obama has not countered with additional spending cuts. However, it appears that the President and Speaker are negotiating.
But is there enough time? By this time two years ago the final bill had already been introduced in both houses, publicly debated, survived amendments, passed both the House and Senate, and been signed by the President. None of those steps have happened this time around. While we have 14 calendar days remaining (15 if you count today), 4 of those days are weekend days and three of them are Holidays. There are reports that the Speaker has told the House members to stay in town over Christmas and the Senators have been advised to return by the 26th; however, President Obama was still planning on leaving for Hawaii for three weeks. Update: Obama Vacation Appears to be Delayed!
If a plan is worked out, should we assume that estate tax portion of the plan will be President Obama's proposal to make the 2009 law permanent? It seems unlikely that any end of the year compromise will include anything more than a one or two year extension. For the most part the estate tax has been left out of the public debate. However, over the last couple of weeks is has been getting some press and comments from public officials; unfortunately, this attention has mostly been arguments for higher estate taxes not maintaining the current exemptions and tax rates.
Assuming that a compromise is reached and the estate tax is returned to 2009 levels, what would have changed? For most people very little – although the tax rate would increase, if your estate is less than $3.5 million for a single person or $7.0 million for a married couple, you would not pay any additional Federal Estate Tax. However, the reduction in the Gift Tax Exemption could impact people living in Washington State or other states with their own estate tax by eliminating their ability to make tax free gifts to reduce their state liability ($170,000 on a $3.5 million estate in Washington). In addition, President Obama has advocated eliminating popular estate tax planning techniques, such as short term GRATs, Income Defective Grantor Trusts, and Family Limited Partnerships and LLCs.
The bad news is that we still don't have any clarity. The good news is that one way or another this will be over in two weeks (at least for now).
First appeared on Surviving the Estate Tax Fiscal Cliff.