Senator Max Baucus recently introduced legislation that would make certain income tax cuts permanent for taxpayers who are in the 28% or lower tax brackets. These cuts include the recently increased child tax credit, marriage penalty relief, and lower middle-income tax rates. The measures were originally passed as part of tax legislation in 2001 and 2003, but are set to expire in 2010. Baucus’ legislation also addresses important estate and gift tax changes, including the preservation of federal estate taxes for persons dying in 2010.
The main income tax elements of the Baucus proposal include the following:
- The bill would increase the AMT exemption amounts to provide permanent protection for certain taxpayers from the alternative minimum tax.
- The bill would make permanent the 10, 25, and 28 percent individual tax rates, as established in 2001.
- For taxpayers now in the 33 and 35 percent brackets, the bill would maintain the 33 and 35 percent brackets for 2009 and 2010, but would allow those brackets to be increased to 36 and 39.6 percent in 2011.
- The bill would make permanent the current income eligibility threshold for the child tax credit, recently set at $3,000 in the recent federal stimulus bill, to give families up to $1,000 for every child under age 17.
- For taxpayers in the 10, 15, 25, and 28 percent tax brackets, the bill would make permanent the 15% tax rate on capital gains and dividends.
- For taxpayers in the current 33 and 35 percent tax brackets, the bill would increase the current tax rate on capital gains and dividends to 20% in 2011.
- The bill would make permanent the marriage penalty relief provision, so that married couples will not be taxed more severely filing jointly than they would as two single persons filing separately.
- The bill would make permanent the 45 percent credit rate for the refundable earned income tax credit for lower wage taxpayers with three or more children, as passed in the recent stimulus bill.
- The bill would make permanent the current expanded assistance for families that adopt a child including a $10,000 tax credit per eligible child.
- The bill would make permanent the 35 percent credit rate for child care expenses up to $3,000 for one child and $6,000 for two or more children.
The main estate and gift tax elements of the Baucus proposal include the following:
- The bill would make permanent the estate tax exemption of $3.5 million and the maximum estate and gift tax rate of 45%.
- The gift tax exemption would be raised to $3.5 million and thus unified with the estate tax exemption.
- Starting in 2010, the bill would allow portability of the estate tax exemption between spouses. For example, this would mean that if a married individual died and used only $2 million of the estate tax exemption (maximum $3.5 million), then the remaining $1.5 million of estate tax exemption could be applied against the surviving spouse’s estate. The surviving spouse’s estate would be subject to federal estate tax only if the survivor’s estate were greater than $5 million ($3.5 million of the surviving spouse’s exemption plus $1.5 million of the decedent’s leftover exemption).
- The bill would index the estate and gift tax exemptions for inflation beginning in 2011.
- Starting in 2010, the bill would increase the amount available under the special use valuation revaluation to equal the estate tax exemption.
- The bill does not address the application of valuation discounts, the use of family limited liability companies/family limited partnerships, or other specific techniques to minimize estate and gift taxation. However, it is possible the budget reconciliation process could incorporate other estate and gift tax “reforms” to address one or more of these planning subjects. Stay tuned.