When You Thought It Was Safe to Go Back in the Water - Estate Tax Revisions

more+
less-

In January 2013, when President Obama and Congress compromised on changes in the estate tax area most commentators thought the changes (part of the American Taxpayer Relief Act of 2012) meant that further changes to estate and gift taxes were off the table, at least for a couple years.  Apparently, this is not the case.

Additional tax revisions were proposed in the administration’s 2014 budget.  The current estate tax law (passed in January 2013) provides that each individual has a $5.25 million “exemption” from estate, gift or generation skipping tax.  This means that a married couple can effectively shelter $10.5 million with the amounts indexed for inflation going forward after 2013.  As part of the estate tax compromise, the estate tax rate was increased to 40 percent on amounts above these exemption limits.

The administration’s 2014 budget is proposing to drop the exemption to $3.5 million for estate and generation skipping taxes and reduce the gift tax exclusion to $1 million.  This proposal also contemplates raising the top estate tax rate to 45 percent and the “exemption” would no longer be indexed for inflation.

While it's unlikely that Congress, as it's presently comprised, would acquiesce to these changes, it does provide some insight as to future proposals that may be made to cut exemptions and raise estate tax rates.

There are number of other tax proposals contained in the 2014 budget, primarily those  intended to raise taxes on the wealthy and upper middle class.  These include:

  • Limiting the amount that could be placed in retirement plans, 401(k)s, IRAs, Roth IRAs, etc.  The basic concept is to limit the amount to a value equivalent to what a higher income government worker would receive as a pension/annuity benefit.
  • New restrictions on deductions for upper bracket taxpayers.  These restrictions would affect deductions for employer-sponsored health insurance premiums purchased with pretax dollars, employee contributions to 401(k)s and other retirement plans.  It would also limit itemized deductions for items such as mortgage interest and charitable deductions.  This is in addition to restrictions in the “Please Amendment” deduction limits already passed in January.
  • Establish a minimum 30 percent tax to apply to individuals with joint income of more than $1 million or single individuals with incomes of $500,000 or more.
  • Eliminate current provisions that allow investors to sell a portion of stock holdings and to specify which shares are sold.  Under the new administration proposals, investors would use an average cost basis rather than a first-in first-out basis or highest or lowest cost basis.

Again, we don't anticipate that all of these proposals will become law but this at least provides a look at what may be on the table.