AICPA Gift and Estate Requests

Posted on October 26, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

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The American Institute of Certified Public Accounts Recommend

[By Children’s Home Society of Florida Foundation]

At a September 13th hearing of the House Committee on Small Business, Subcommittee on Economic Growth, Tax and Capital Access, Jeffrey A. Porter of the American Institute of Certified Public Accounts (AICPA) discussed recommended tax provisions to be considered in November.

A section of his testimony covered proposed gift and estate tax provisions:

1.  Generation Skipping Tax – AICPA requests that the technical GST  modifications passed in 2010 be made permanent.

2.  Estate and Gift Exemption – The $5 million exemption with indexing should be made permanent.  If a lower exemption is passed, there should be no recovery of gift taxes for transfers made in 2011 and 2012 with the larger exemption.

3.  Uniform Exemption Amount – The gift, estate and generation skipping tax exemptions should remain uniform to avoid undue complexity.

4.  Marital Portability – The option to permit use of the exemption of a prior deceased spouse should be made permanent.  Marital portability should also extend to generation skipping tax.

5.  State Tax Credits – Congress should reinstate a state tax credit.  Under the current system, many states have “decoupled” and the different federal and state systems have created undue complexity.

6.  Tax Liquidity – Revise the installment payment of taxes under Sec. 6166 and extend it to all types of business interest.

7.  Gift and Estate Brackets – Do not create gift and estate “cliff” brackets.  For example, a 15% and a 30% bracket could create great differences for taxpayers with moderately different-sized estates.

Conclusion

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On the US Tax Code Complexity

Posted on April 20, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

Recent Ways and Means Committee Meeting

By Children’s Home Society of Florida Foundation

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At an April 13th 2011 hearing on the tax code before the Ways and Means Committee, witnesses noted that there is a general consensus on the complexity of the tax code.

Enter Albert Einstein

One witness quoted Albert Einstein, recipient of 1921 Nobel Prize in Physics. While he was the world expert on the Theory of Relativity, Dr. Einstein also commented that “the hardest thing in the world is to understand the income tax.”

At the hearing, Chairman Dave Camp (R-MI) noted there are “nearly 4,500 changes in the last decade – 579 of them in 2010 alone – the code is too complex.” Other representatives and witnesses agreed that the sheer size and complexity of the Internal Revenue Code make compliance very challenging.

Enter the AICPA

Annette Nellen represented the American Institute of Certified Public Accountants in the hearing. She indicated that there are five specific steps that could be taken to substantially reduce the complexity and cost of complying with the code. These include the following actions.

1. Higher Education Deductions and Credits – Reduce the Hope Credit, American Opportunity Credit, Lifetime Learning Credit, the tuition and fees deduction and other benefits into one simple credit.

2. Education Phase Out – Create one definition for qualified education expenses and eliminate the multiple phase outs under the current system.

3. Kiddie Tax – For children with unearned income under age 18 or students under age 24, simplify the current method where they pay tax at their parents’ rate.

4. Mileage Rates – Create the same mileage rate for business purposes, medical purposes and qualified charitable travel.

5. Alternative Minimum Tax – Repeal the tax because it is too complicated to modify.

Enter the Financial Planner

Financial Planner Mark Johannessen is a CFP™ and Managing Director of a McLean, Virginia financial firm. He was President of the Financial Planning Association in 2008 and suggested that there are a number of Internal Revenue Code issues that make financial planning difficult.

First, there are temporary provisions. For example, the 2011 tax rate on dividends is 15%, but the scheduled tax rate on dividends in 2013 is 43.4%. While it’s possible that Congress could change the law between now and 2013, it makes investment planning very difficult.

Second, many changes are temporary and Congress tends to act very late in the year. Congress passed the IRA Charitable Rollover for 2010 on December 17. By that date, most individuals had already taken their required minimum distribution. Johannessen indicated that the late date “negatively impacted both the individuals’ planned charitable giving” and also the charities who received fewer gifts.

Third, the uncertainty in estate tax law continues to make planning quite difficult. While the current exemption is $5 million and there now is portability for couples, the current law only applies for 2011 and 2012. To do good planning, it is essential to know what the law will be in future years.

Assessment

Conclusion

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Understanding the 2010 Estate Tax Basis Problems

Posted on August 4, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

AICPA Tax Basis Issues

By Children’s Home Society of Florida Foundation

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At a July 27, 2010 conference sponsored by the American Institute of Certified Public Accountants, Treasury Representative Catherine Hughes discussed the basis issues that are arising concerning 2010 decedents.

2010 Estate Tax Repeal

While the estate tax is repealed during 2010, under Internal Revenue Code Sec. 1022 there are new and complex rules on basis adjustments. For large estates, a majority of the assets will be transferred with a “flow through” of the basis. That is, the heirs will be able to use the basis of the decedent in any future sales for the purpose of reporting capital gain. Because many decedents have few or no records of the basis, it is quite possible that these heirs will pay capital gains tax on the full value of future sales.

Allowances for Basis “Step-Up”

However, there are allowances for a basis “step-up” of $1.3 million. In addition, for a surviving spouse, the basis step-up can be $3 million. The step-up in basis cannot be greater than the fair market value of the applicable property. Determining how to allocate the adjusted basis step-up in an estate has caused great concern among estate planning attorneys and CPAs. Treasurer Representative Hughes stated, “I anticipate there will be a lot of mistakes where there isn’t an affirmative allocation” of basis. Treasury is studying the situation and may issue guidance with recommended default allocation rules.

Assessment

While Congress continues to debate estate tax law and, therefore, has not made any decision on a potential retroactive estate tax, the nonpartisan Tax Policy Center this week released an estimate of the potential number of 2011 taxable estates. If a $1 million exemption is applicable in 2011, there will be an estimated 43,500 estates subject to tax. If the 2009 exemption amount of $3.5 million per decedent is applicable next year, the number of taxable estates is reduced to $650,000.

Editor’s Note: The discussion in Washington on the practical aspects of allocating the basis step-up now suggests that there may not be a mandatory retroactive estate tax law. With the pending election, it now seems very likely that Congress will not act on the estate tax before December. The Senate continues to have great difficulty developing a plan acceptable to 60 Senators and to the House of Representatives. However, Senators now recognize that a $1 million exemption and tax on 43,500 estates will impact a large number of middle-class children and other beneficiaries. Therefore, it seems quite likely that a compromise should be passed in December. However, as the AICPA basis adjustment discussion suggests, this compromise is now less likely to mandate an extension of the 2009 exemption for 2010. As a result, attorneys and CPAs will need to address the very complex and uncertain basis adjustment problems for 2010 estates.

Conclusion

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