Bush Tax Cuts Live On

The Dustbin of History?  When President Obama was re-elected on November 6, 2012 I assumed the Bush Tax Cuts would soon land in the dustbin of history. The President and the Democratic Party blame the Bush Tax Cuts for  many of the things that have gone wrong in the American economy since 2008. All that was required to end the Bush Tax Cuts and reinstate the Clinton era tax increases was to hold fast until January 1, 2013 and it would happen automatically. But a funny thing happened as Americans prepared to skid off the fiscal cliff – most of the Bush Tax Cuts were made permanent.

Does anyone down there know how to cut a deal? If the Wall Street Journal can be believed, Kentucky Senator Mitch McConnell and Vice President Joe Biden were the authors of the legislation. McConnell reportedly called the Vice President on December 30, after talks with Democratic Leader Harry Reid had broken down. From that point forward, Biden and McConnell cobbled out the deal that ultimately became law. On New Year’s Day, the Senate approved the deal 89 to 8 and the House followed up with its own vote of 257 to 167 in favor. Two days later President Obama, from Hawaii, by “autopen” signed into law the bill that averted the automatic imposition of the Clinton era tax rate increases.

Here is a sample of what was enacted.

A permanent per-person estate tax exemption of $5.25 million, adjusted periodically for inflation. That means a married couple can pass more than $10.5 million to the next generation free of estate tax. Unless a future President and a future Congress can agree on a change, I could practice law for 20 more years, with a reasonably wealthy clientele, and never see another decedent’s estate pay estate tax.

A permanent per-person gift tax exemption of $5.25 million, adjusted periodically for inflation. The estate tax exemption and gift tax exemption are now “unified.” You can use your entire $5.25 million exemption either during your life or at your death.

Portability is now permanent.  First introduced in 2011, it is a technique available to married couples to reduce estate taxes. It allows the surviving spouse to add the unused estate tax exemption of a deceased spouse to the surviving spouse’s exemption. This is accomplished by filing a federal estate tax return on IRS Form 706 for the estate of the deceased spouse and making the election provided on that return. This means the end of the use of by-pass trust planning for most married couples of modest weath. 

Marginal income tax rates for those above the $450,000 (married) or $400,000 (single) threshold will shoot up to the Clinton era 39.6% rate. For everyone else, the Bush rates apply.

Capital gains and dividends will be taxed at 20 percent for those with income above the $450,000/$400,000 threshold. The Bush tax rates will remain at 15 percent for everyone else.

Permanent?  I’m reminded of Inigo Montoya. “You keep using that word. I do not think it means what you think it means.”  While the new legislation brings a measure of certainty to estate planning that has not existed for several years, it is permanent only in the sense it will not automatically expire. There is nothing to prevent a future Congress and a future President from changes in the federal tax laws. In fact, few things are more certain.