President Obama added new revenue offsets worth hundreds of billions of dollars in the final release of his full budget proposal. The new budget builds on the blueprint the administration issued in February with the tax details provided in the Treasury Department’s “greenbook” explanation. Scores of new tax proposals were unveiled in the final release, most of them designed to raise revenue.
Taxes on estates
Currently, the estate tax is set to expire in 2010, and then come back in 2011 with an exemption of just $1 million and a top rate of 55 percent. Obama proposes to extend permanently the 2009 estate tax law with an exemption of $3.5 million and a top rate of 45 percent, but also proposes the elimination of certain common and accepted estate planning techniques.
For example, new restrictions would be imposed on valuation discounts. Taxpayers can generally discount the value of assets for estate and gift planning purposes by creating a family limited partnership (or a limited liability company) to limit the control and marketability of assets. Obama’s budget proposals would restrict taxpayers from applying these discounts when transferring assets to heirs.
The administration also proposes a new minimum term requirement of 10 years for grantor annuity trusts, or GRATS. This would make a GRAT a riskier planning technique because the transfer tax benefits of GRATs occur when the grantor outlives the GRAT term.
The enactment of these, and other proposals, could change the estate tax planning strategies for many individuals.
Taxes on the wealthy
Obama’s final budget also proposes raising marginal tax rates on high-income taxpayers, increasing how much they pay on capital gains and dividends, and reducing or eliminating their personal exemptions and deductions. All of these increases would take effect at income levels of $200,000 for singles and $250,000 for married couples.
The proposed changes that would most impact high-income taxpayers include:
• increasing the two top tax brackets from their current 33 percent and 35 percent rates to 36 percent and 39.6 percent in 2011;
• increasing the tax rate for long-term capital gains and qualifying dividends to 20 percent, while keeping the rate at 15 percent for everyone else;
• reinstating the personal exemption phaseout in 2011 so that the value of personal exemptions taxpayers receive for themselves, their spouses and children ($3,650 each in 2009) would be reduced by three percent;
• reinstating the “Pease” phaseout of itemized deductions, which would limit most deductions by up to 80 percent for high-income taxpayers; and
• adding a new additional rule for all itemized deductions that would limit their value to a maximum of 28 percent so taxpayers in the 36 percent and 39.6 percent brackets would save less on deductions for things like mortgage interest and charitable gifts.
It’s important to remember that many of these tax proposals remain controversial, and there is no guarantee that they will be enacted. A presidential budget proposal is important, but it is far from the last word. Many of the tax proposals will be carefully examined by Congress, while others may not be considered this year, or ever.
Dan Potter is a director with the private wealth services practice in Grant Thornton LLP’s Milwaukee office.
