The White House recently released its Fiscal Year 2014 budget proposal, and there are many suggested changes that will impact individuals, businesses, and estates. Several of these proposals—particularly on the estate and gift tax side—have been made previously, and have failed to become law. It is also important to remember that the President’s budget proposal is, essentially, a wish list that requires Congressional cooperation. Nonetheless, the budget proposal provides insight into what current tax breaks are at least being considered for limitation or elimination.
On the individual tax front, the most significant proposal would limit the value of itemized deductions to 28% for taxpayers in the higher tax brackets. The alternative minimum tax currently provides a certain limitation of deductions, but this proposal would extend beyond the limitations currently in place via the alternative minimum tax. Additionally, the so-called “Buffett Rule” would require the highest earners to pay no less than 30% of their income in taxes. One final proposal of interest would prohibit individuals from accumulating more than $3 million in tax-advantaged retirement accounts. These budget proposals represent a continuation of some of the themes that the White House pursued during the “fiscal cliff” negotiations of late 2012.
Several of the budget proposal items relating to estate and gift tax have been targeted in prior years, but have failed to gain momentum. For example, the 2014 budget proposal seeks to place significant limits on grantor-retained annuity trusts, a tried-and-true estate planning technique that has provided benefits to many families to date. The proposal also seeks to limit the extent to which families may benefit from “dynasty trusts” that can now provide lasting benefits to generation after generation. Most importantly, the budget proposal seeks to return the estate and gift tax exemptions and tax rates to 2009 levels. The current $5.25 million unified estate and gift tax exemption would revert to a $3.5 million estate tax threshold and a $1 million gift tax threshold. The tax rate would increase from 40% to 45%. In real terms, this change would subject to onerous taxes a substantial number of families who are currently exempt.
The White House’s 2014 budget proposal is a long way from becoming reality, but it is worth noting that there is little in the proposal that seeks to reduce taxes. To the extent that any of these proposals becomes law, it will be more important than ever to seek professional advice to properly respond to the changes. If you would like to discuss any of these matters, please call Les Williams at 410-783-6403.