There are many provisions, or concepts, of the expiring cuts that should be continued. One of the more important concerns the “marriage tax penalty”. The expiring tax cuts attempted to address this – although the attempts made were not much more than token in nature, although good ones.
As I have said for several years now – to truly do away with the “marriage tax penalty” the Congress would have to change the rules for “Married Filing Separately” so that separately filed federal returns would be totally equal to filing as two Single taxpayers. There is also built into the table for joint filers a “marriage tax benefit” for one income couples, which I tend to recommend doing away with. The Tax Code should be “marriage neutral”.
I also like the 10% tax bracket, and the lower rates for qualified dividends, as an alternative to doing away with the double-taxation of corporate dividends, and capital gains. While I am certainly pleased with the substantial tax savings that the 0% capital gain and qualified dividend rate has provided to my clients, from a tax policy point of view I would prefer the return of the 5% rate.
Of course the alternative to the lower tax rate on qualified corporate dividends is to do away with the double taxation altogether by allowing corporations to claim a “dividends paid” deduction.
I am not a fan of the Estate Tax – but realize that its continued existence is essential if the concept of “stepped-up” basis is to be maintained. Having to use “carryover” basis for inherited property would be a disaster. I do not want the Estate Tax to revert back to what it was BW (before “W”).
When the new Estate Tax rules are finally passed I would like to make sure that the Gift Tax “unified credit” is the exact equivalent of the Estate Tax exemption. If the first $5 Million of one’s estate is exempt from the Estate Tax, then the lifetime Gift Tax exemption should also be $5 Million. For 2009 the Estate Tax Exemption was $3.5 Million but the lifetime Gift Tax exemption was only $1 Million. While the “Bush” cuts did away with the Estate Tax in 2010, it did not do away with the Gift Tax. For 2010 the Gift Tax “unified credit” is equal to the tax on $1 Million. If there is no Estate Tax there should be no Gift Tax – and if the Estate Tax is reinstated the lifetime exemption for both taxes should be the same.
But the extension of all or part of the “Bush” cuts is not the only tax matter that Congress must deal with before year-end (and hopefully, for the IRS sake, before December). There is also the “extenders” – most importantly the extension of the “patch” to the dreaded Alternative Minimum Tax.
Joe Kristan identifies the work to be done in his post “The Tax Legislation Rolling Train Wreck” at the ROTH AND COMPANY TAX UPDATE blog, adding the Small Business bill to the list of open items. As Joe puts it in his post – “Rarely have so many pieces of the tax law been up in the air”.
Joe’s post goes on to predict what he thinks Congress will do before the end of the year –
• “An AMT patch will patch in the run-up to the elections, along with some sort of 'small business' relief, including (probably) extended bonus depreciation.
• A lame-duck Congress will pass extender legislation.
• Some sort of extension of parts of the Bush tax cuts will pass, but the top rate will still rise to 39.6%. The dividend and capital gain rate will be held to 20%.
• Congress will deadlock on the estate tax, and we'll start 2011 with a $1 million lifetime exemption and a 55% top rate.”
I do agree that Congress must, and will, pass another one-year AMT patch and extend for another year the popular expiring breaks that have become known as the “extenders”. And Congress must, and will, extend for one more year pretty much all of the “Bush” tax cuts, except for bringing back the 36% and 39.6% top rates. I expect the 5% and 15% capital gain rates will remain with perhaps 20% for those in the reinstated top two rates.
I also agree that this will be done after the election. I trust the IRS will put off printing the 2010 forms until the middle or end of November. Unfortunately this may cause delays in the issuance of the first wave of 2010 refunds.
But I also expect that Congress will pass some kind of revised federal Estate Tax, even if just for one year.
What Congress must do in 2011 is totally rewrite the Tax Code, making it much simpler and more fair.
Will Congress rise to the challenge and fix the mucking fess that is the federal Tax Code in 2011? I can dream, can’t I? But, between you and me, I ain’t holding my breath!