Unless you have been hiding under a rock, you know by now that the Obama Administration and the Republicans have reached a compromise on the Bush-era tax cuts, which will not only extend the current income tax rates for the next two years for all Americans, but also keep any capital gains and dividends taxed at the current lower tax rates.
The compromise also reinstitutes the estate tax from the 2010 level (no estate tax—everything is exempt) up to a $5 million exemption per person. This means that a married couple will have a $10 million exemption. Additionally, it sets an estate tax rate of 35 percent for any amount above the $5 million or $10 million limit.
This will fix a major source of estate planning confusion. The compromise will be a relief for both investors and their advisors in terms of planning for the future.
Right now, for 2010, there is no estate tax for anyone who dies this year; however, their heirs will inherit the tax basis of the assets they receive. This will create some difficult tax calculations going forward, but there is still no tax. That's good for anyone who is entitled.
If no new law were passed, the estate tax exemption would have reverted to $1 million on Jan. 1, 2011, and the top estate tax rate would have moved up to 55 percent. That's not good—for anyone.
Under the current compromise, unemployment benefits will be extended. There is also some talk of the compromise including Republican support for a nuclear treaty aimed at reducing Russian nuclear weapon stockpiles. And that's good for everyone, not just for those still looking for work.
For now, it looks like the compromise will add about $315 billion to the federal deficit over the next two years, give or take a billion. There will be a lot more clarity on the details of the deal over the next few weeks, but realize that this last-minute compromise makes it difficult to do proper and exact tax planning as we enter the last few weeks of the year. As details are worked out in Congress and with the President, it will all become clearer.
Talk to your tax advisor about any serious questions you have well in advance of the end of the year.
David B. Armstrong CFA, is a Managing Director and co-founder of Monument Wealth Management in Alexandria VA, a full service Private Wealth Planning and wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. He has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep magazine (2009 & 2010) based on asset under management. David and Monument Wealth Management can be followed on their blog at "Off The Wall", their Twitter account @MonumentWealth, and on their Facebook page. Member FINRA/SIPC.
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