Estate Tax, part 6

There is some concern that changing the estate tax rules in the middle of the year might be unconstitutional. One proposal that tries to deal with this problem is to give estates a choice of using either the 2009 rules or the 2010 rules.
The 2010 rules, headlined by an absence of any estate tax, are not as simple as they sound. Assets inherited under the rules in place until the end of 2009 become valued at fair market value as of the date of death (or an optional alternative date). Assets inherited under the 2010 rules would keep the same value they had when the decedent owned them. Thus there could be huge capital gains if the heir sells the assets. There is an exemption of $1.3 million in gains for such cases, plus an additional $3 million exemption for surviving spouses.
The Senate may be tied up for a while longer in fighting over changes to the health care bill that just passed. That could further delay action on the estate tax.

Estate Tax, part 5

Basically, there is nothing new yet on this. Republicans in the Senate want to raise the exemption to $5 million and lower the tax rate to 35%. Maybe they will get to work on this after they finish the work they are doing now on other taxes (see previous post).

Tax changes

The Senate just passed a bill that contains some tax reductions. The headline items are mainly for small businesses. One provision calls for a tax break for businesses that hire new people during 2010. Restoring the expanded write-offs for purchases of new equipment is also part of the bill.
There were a number of tax breaks that expired at the end of 2009. Most of these are being restored in this new tax bill. For example, the option to distribute money from an IRA directly to a charity without paying tax on the distribution--an option that expired this year--is to be restored. Credits for college tuition--valid in 2009 but dead so far in 2010--are also targeted for revival. The House will still have to act on the bill to make it law.

First-Time Homebuyer Credit

Taxpayers claiming this credit will not be able to e-file this year.
Legislative changes in November 2009 expanded and extended the credit and also added documentation requirements for claiming the credit. For homes purchased after November 6, 2009 a copy of a properly executed settlement statement is required to be attached to the return. Due to increased compliance checks by the IRS, it is highly recommended that a copy of a properly executed settlement statement be attached to all returns claiming the credit, regardless of the date of purchase. Proper documentation will help to expedite the processing of the return when attached on any claim for the credit.


Form 5405 (to claim the credit) is not eligible for e-file. The IRS will not begin processing paper filed Forms 5405 until mid-February.

Learn more about the First-Time Homebuyer Credit by going to: https://www.irs.gov/newsroom/article/0,,id=204671,00.html

Municipal Bonds rates up

An interesting side-effect of the financial crisis is that interest rates on municipal bonds are now about the same as the rates for US Treasury bonds. Usually muni rates are lower than Treasury rates. High-income investors accept the lower rates because muni interest is exempt from Federal income tax. Currently, however, many investors are concerned about the safety of municipal bonds, because many of the state and local governments that issue them are having serious budget problems. Also, bond-insurance companies have been hit hard by the crisis, adding further stress to the market. Higher demand for Treasuries and lower demand for munis has lowered the market rates on the former and raised them on the latter.
One would think this situation would eventually return to normal, but there is a new development in this mix. There is a Federal subsidy available to state and local governments that issue taxable bonds. The feds will pay 35% of the interest that the states and locals are on the hook for. This subsidy is scheduled to expire at the end of this year, but it could be extended, because it appears by some calculations to be more efficient than having a tax exemption for muni bonds. If it became permanent, it could change the market for municipal bonds permanently, according to The Economist, an international weekly news and economics magazine.
Does this mean that muni rates will stay high? It could mean that, but theories to project investment values don't always work out. Investors will need to watch carefully and be mindful of the elevated risk.

Estate Tax, part 4

The Estate Tax was allowed to expire, an outcome that was set in motion by a law passed in 2001. So, at the moment there is no “death tax.” However, Congress plans to resurrect it, probably retroactive to January 1, 2010. The only reason they let it expire was that they were too busy arguing about health care.
In 2009 the estate tax exemption was $3.5 million, with a 45% tax on everything above that amount. Guesstimates are that the new law will have an exemption of between $3.5 million and $5 million.
Stay tuned for further developments.

Section 179 and Bonus Depreciation

A tax provision that many small businesses take advantage of every year is the ability to write off in full the purchase of machinery and equipment (including heavy vehicles) instead of depreciating it. This is known to accountants as the Section 179 deduction.
The limit for this write-off had been temporarily increased to $250,000 for 2008 and 2009, but because Congress was preoccupied with health care at the end of last year, the limit automatically reverted back to $134,000 for 2010.
Congress can still take action to restore the higher limit, and many analysts predict that they will do so. And there is a good chance that they will make the remedy retroactive to January 1.
Another depreciation break that expired at the end of 2009 was a 50% bonus—an option to write off half of certain new machinery and equipment in the year of purchase. That too has a strong chance of being revived. If it is restored, it can be used on top of the expense deduction described above, such as for purchases over the $134,000 (or $250,000) limit.