Monday, January 25, 2010

Tax Relief for Charitable Contributions to Haiti

On January 22 President Obama signed a bill (H.R. 4462) that allows taxpayers to deduct on their 2009 tax returns charitable cash contributions made for the relief of victims affected by the earthquake in Haiti by treating these contributions as though they were made on December 31, 2009. The bill would apply to contributions made after January 11, 2010 and before March 1, 2010.

The bill could have significant implications for taxpayers' penalties for underpayments of estimated tax, as well as their state (and local) income tax liability.


Wednesday, January 13, 2010

Trusts and Estates Tax Advisory

Congressional inaction in 2009 has led to a one year repeal of the federal estate and generation skipping transfer taxes effective January 1, 2010 and expiring December 31, 2010. If Congress fails to act in 2010, the federal estate tax will revert in 2011 to the 2000 rules and the exempt amount of $1 million.

Barring retroactive reenactment of these taxes, and at the risk of oversimplification, the primary effects of this change are as follows:

  1. Temporary elimination of the federal estate tax for individuals dying in 2010. Residents of certain states, including New York, New Jersey and Connecticut will still be subject to a state estate tax.

  2. Temporary reduction in the maximum federal gift tax rate to 35% for lifetime gifts made during 2010, with the $1 million exemption for lifetime gifts being retained.

  3. Temporary elimination of the generation skipping transfer tax with respect to outright transfers in 2010 by lifetime gift or by will to grandchildren or more remote descendants. Transfers in trust may be subject to the generation skipping tax in years after 2010, even though no tax is imposed on the creation of such a trust.

  4. The income tax basis of property that is included in the estate of an individual dying in 2010 will not be stepped-up to the date of death value. Inherited property will now be subject to complex carry-over basis rules (after an exemption of the $1.3 million in gains, with an additional $3 million exemption in gains for property inherited by a surviving spouse).
Congress may eliminate these changes, possibly with retroactive effect to January 1, 2010, by reenacting the federal estate and generation-skipping transfer taxes. This possibility results in any changes being perilous. Furthermore, existing estate plans may be adversely affected by the repeal of these taxes, especially if a will or trust instrument utilizes a tax related formula provision to determine the distribution of assets among beneficiaries.