Saturday, August 28, 2010

Tax Season Is Here: Estate Planning And Tax Issues

As we head into the fall, Tax Lawyers and Accountants know that this time of the year, more so than the spring April 15 deadline, is really Tax Season -- the time when Congress typically passes new law to be effective the following year.

This "Tax Season" is especially interesting (well, it's "interesting" if you follow tax laws for a living) since (i) many general provisions of the pre-9/11 2001 Tax Act are set to expire at year end, and (ii) among those provisions is the Federal Estate Tax, currently repealed but set to return at a very low exemption amount $1,000,000 per person. Throw in a weak recovery from a recession and a fairly serious Federal Deficit (and, for us in California, what can only be described as a continuing budget crisis), and there is a lot of potential for laws which could effect large swaths of taxpayers in a material way.

Of course, its also a mid-term Congressional election year, which means both parties will be due to issue "highly tactical" if not always "technically accurate" statements about tax law.

Here is a short list of what might make the front page of the papers this fall:

1. At what rate will the Estate Tax return? With so much of the year gone by, the odds of any sort of retroactive tax appear to drop by the day. However, Congress may be tempted to simply let the law switch back on January 1st, and if that happens a $1,000,000 exemption will mean that many taxpayers who did not have to concern themselves with Estate Taxes at all will need to do so.

2. Will income tax rates return to something approaching Clinton-era rates? For taxpayers in the top bracket, this means about a 4 to 5 percent increase. The debate about whether that should or will happen would require quite a bit of space (maybe a couple of blogs?) but what it may well mean is that if there is an opportunity to take income this year as opposed to next year or later, the savings could be material.

3. Will the Social Security and Medicare tax rates change? There is no area of tax more misunderstood than this one, mainly because neither political party has any interest in boring taxpayers with the actual details when so many votes can be had by getting everyone fired up with policy debate.

The fundamentals are:
(i) Both programs are more than 70 years old,
(ii) for the first 40 or so years, they were "pay as you go" the rates of tax were based on the payouts of the programs on an annual basis,
(iii) in the mid 1980's it was decided that workers should be, essentially "over charged" to build up a "reserve" for the baby boom generation bulge.

I put "over charged" and "reserve" in quotes because both terms are highly subjective, the reality is that if Social Security paid out $X since 1985 all of the taxpayers were charged about $2X during that time. Why? Well, this excess did not technically go into a big mattress, but went to basically reduce overall Federal Government borrowing (i.e., we own less to China and more to "ourselves").

So, when anyone says "the Social Security Trust fund will run out" it actually means that general tax revenue will need to start paying back the excess revenue borrowed since 1985. This is sometimes portrayed as a disaster, but in actuality its about what the Iraq occupation has cost. This will not happen in the short term (i.e., this fall), but there are going to have to be some adjustments somewhere in the system, and the information given to taxpayers is going to be far from the basic facts needed to make an informed decision -- it's just too easy to demagogue this issue.

4. Will California adjust its own taxes at some point? We don't talk about State taxes much, especially since California does not have a separate Estate Tax. However, with the state budget crisis seeming to persist year after year, how long will it be before California considers it?

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.