Estate Planning and Tax Lawyer Blog

A few days ago, President Obama released his proposed 2013 fiscal year budget. Remember, this is only a proposal and not a budget that has been passed by Congress. There will be quite a bit of negotiating and compromising that will come to pass aspects of this budget. However, I wanted to lay out some of the tax aspects of the proposal. They are as follows:

1. Extend the Bush tax cuts for all but the top 2 income tax brackets. The current top 2 brackets (33% and 35%) would increase to 36% and 39.6% respectively.
2. Increase the long-term (held for longer than 1 year) capital gains rate to 20% for single taxpayers who make over $200,000 per year, $250,000 for married couples who file jointly, and $125,000 for a married person filing separately.
3. Tax rates for qualified dividends would increase to ordinary income rates for the same tax payers as described in #2 above. A qualified dividend is an ordinary dividend that is subject to a lower tax rate equal to long-term capital gains. However, certain conditions must be met in order to qualify:
a. The dividends must have been paid by a U.S. corporation or a qualified foreign corporation. Generally, a qualified foreign corporation is a foreign corporation traded on any of the US stock exchanges;
b. The IRS does not list them as not qualified; and
c. You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
4. Tax carried interests as ordinary income. Carried interests are a share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This type of compensation seeks to motivate the fund manager to work toward improving the fund's performance.
5. Reinstate the personal exemption phase-out for upper income taxpayers. A lot of deductions and exemptions begin to phase out once your income hits a certain level.
6. Enact a permanent patch to the AMT tax. This has been debated for many years but has never been permanently fix.
7. Restore the estate, gift and GST tax to 2009 rates. Remember that back in 2009, the estate tax and GST tax exemptions were $3.5M each with anything above that being taxed at 45%. The gift tax exemption was $1M per person with anything above that amount taxed at 45%.
8. Require the minimum term for a GRAT to be 10 years. A GRAT, also known as a Grantor Retained Annuity Trust, is a trust set up to give the trustmaker an income stream for a term of years and then passing any remainder onto the beneficiaries of the trust (usually their children). The goal is that that trust will grow faster than the income being distributed so that the assets will appreciate and all the appreciation will pass onto the beneficiaries.
9. Limit the duration of the GST tax exemption to 90 years. This is the first time I’ve seen this proposal. This would prevent someone from setting up a Dynasty trust to benefit his heirs for a term of years that is longer than 90 years.
10. Modify the rules on valuation discounts. This is used to transfer value in business interests to children and grandchildren at discount rates due to lack of marketability and lack of control.

The above are just a few of the proposals in the fiscal budget announced. Only a small handful will have an actual chance to be passed when it is all said and done. Keep watching the news for updated information.