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Prediction: Tax Laws Will Change in 2007
by Arthur F. Dicker, Esq. and Louis W. Pierro, Esq.
Happy New Year!
Congress has been prolific in tinkering with the Internal Revenue Code, especially in recent years. In 2006 alone, we had the Tax Increase Prevention and Reconciliation Act (“TIPRA”), the Pension Protection Act, and at the very last minute, the Tax Relief and Health Care Act, which extended to 2006 certain income tax breaks such as the sales tax deduction and the tuition-and-fees deduction, after the IRS had already sent the 2006 tax forms to the printer!
It is safe to predict that 2007 will see more tax changes. In particular we can expect Congress to address two key issues: estate tax reform and alternative minimum tax relief. Advising your clients in these two critical areas will be a key to their financial and estate planning.
Unless it is repealed or revised, the alternative minimum tax will begin to affect increasing numbers of middle class taxpayers. Congress created the AMT in 1969 to make sure that wealthier taxpayers with lots of deductions paid at least some income tax. However, since it was never indexed for inflation, the AMT is now reaching down into the middle class, spurred by the reductions in regular income tax rates in recent years.
The alternative minimum tax is an entirely separate tax system. The AMT calculation disallows many common deductions from the regular tax system, such as state and local taxes, as well as personal exemptions (in effect penalizing larger families). For more information on how the AMT works, see our July 2005 Tax Planning E-Letter, “Demystifying the Alternative Minimum Tax” (available at www.pierrolaw.com).
The problem that the administration and Congress must wrestle with is that the AMT in its current form is scheduled to raise a substantial amount of revenue for the government – as much as $1.7 trillion over the next decade by some estimates – and Congress hasn’t figured out how to replace it. Instead, Congress has been resorting to a series of one-year AMT “patches” to postpone the day of reckoning. Rep. Charles Rangel, the incoming chairman of the House Ways and Means Committee, and Sen. Max Baucus, the incoming chairman of the Senate Finance Committee, have indicated that AMT relief will be a top priority for the new Congress. But the question remains – where will the tax dollars come from to replace lost revenue due to AMT reform?
Enter the estate tax, itself a temporary measure enacted in 2001 to pave the way for permanent repeal of what was characterized as the “death tax”. With the change in control of the Congress, it seems unlikely that the federal estate tax will be permanently repealed. Under current law the estate tax is scheduled to be repealed for one year only (2010). Thereafter, in the absence of any further reform, on
There is widespread bipartisan support for some sort of permanent reform short of repeal. For example, one prediction by a member of Congress holds that the estate tax exemption will be fixed at between $3.5 million and $5 million, and the top rate will correspond to the capital gains rate -15% - for the first $5 to $10 million of taxable estates, with a higher rate for the balance over that.
Proposals under discussion would generally preserve the step-up in basis at death, which would not be the case if the current law stands and repeal in 2010 becomes a reality. The proposed “carry-over basis” rules would help offset losses in revenue from estate tax repeal, but the administrative burden on tracking basis and reporting gains would be enormous.
It is also important to remind clients of three related tax rules: 1. The federal gift tax exemption remains at $1 million; 2. The New York State estate exemption remains at $1 million; and 3. the Generation Shipping Transfer Tax exemption remains tied to the federal estate tax. With the patchwork quilt of federal and state tax law that will exist for the foreseeable future, the use of “post-death” planning through disclaimers and QTIP trusts will continue to be relied upon to provide the flexibility necessary to mold a client’s plan to fit the law in effect at the time of his or her death.
In sum, the Chinese proverb “The only thing constant is change” is proven true each year through the tax law. The Pierro Law Group will continue to monitor and anticipate the changes, and to help guide clients through the wide range of planning opportunities.
If you have any questions about the matters discussed in this e-letter, please contact Lou Pierro or Arthur Dicker at (518) 459-2100. Prior Tax Planning E-Letters may be accessed at www.pierrolaw.com.
**To the extent the preceding text contains an opinion on one or more Federal tax issues, such opinion was not written to be used and cannot be used for the purpose of avoiding penalties. If you would like a written opinion on the Federal tax issues addressed in this email, upon which you can rely for the purpose of avoiding penalties, please contact our office.