2008 Proposed Tax Legislation

Louis A. (Drew) LaGrande, Esq. is a contributing author to the Yesner & Boss, P.L. blog and the following is a recent article which he contributed. Drew is a partner at Akerman Senterfitt based in Tampa, FL and specializes in legal areas such as estate planning and taxation.

The following is a brief summary of the potential changes in the tax law that may become effective under President-Elect Obama's administration. As you know, we have seen significant changes this year with respect to the volatility of the stock market, government bailouts and a newly elected president. President-Elect Obama has proposed several tax changes that may become effective during his term as President. There are many changes to President-Elect Obama's proposal, but the highlights of his plan are summarized below.

Income Tax Rate Increases

One of President-Elect Obama's tax changes will increase the individual's top federal income tax bracket from 35% to 39.6%. This increase affects individuals earning more than $250,000 per year. The next highest tax bracket is currently 33% and the proposed increase would raise this bracket to 36%.

In addition, long-term capital gain and unqualified dividend rates will increase from 15% to 20% for taxpayers earning more than $250,000 per year.

Tax-free Distributions from IRAs to Charities

For 2008 and 2009, the Emergency Economic Stabilization Act of 2008 was enacted to provide relief to the financial markets. This Act added $150 Billion in tax incentives to the relief package. The Act excludes from gross income an otherwise taxable distribution from an IRA in which a distribution is made by the IRA Trustee directly to a tax-exempt organization. This technique is not available for contributions to a private foundation nor donor advised funds. In addition, the distribution will not count toward the owner's required minimum distribution and cannot exceed $100,000 per taxpayer per year. This provision has been in effect since 2006 and will be extended through 2009.

Higher Education Tuition Deduction

The Act also ends the Higher Education Tuition Deduction through 2009. The amount of the deduction depends on the adjusted gross income. For taxpayers who are married and file jointly, the maximum tuition fees deduction is $4,000 if the couple's combined gross income is less than $130,000. This deduction is reduced to $2,000 if the combined gross income is between $130,000 and $160,000 per year. If the combined adjusted gross income is in excess of $160,000, then the maximum tuition fees deduction is $0.

Gift Tax Consideration

The annual gift tax exclusion is the amount that each person can give to any number of recipients without a gift tax consequence. This amount is currently $12,000 but will increase to $13,000 per beneficiary per year beginning in 2009.

Estate Tax Consideration

Currently, the applicable exclusion amount or the amount that can pass free of estate tax to any beneficiary is $2 million. This applicable exclusion amount will be increased to $3.5 million in 2009. In 2010, the estate tax will be repealed for one year. Thereafter, in 2011, the applicable exclusion amount will be decreased to $1 million. The top taxable estate tax rates are currently 45%. In 2011, such top taxable estate tax rate will be increased to 55%.

There is uncertainty surrounding the future of the federal estate tax. We may well see revisions to the estate tax law in the coming years because of the general recognition by Congress (and everyone else) that the current laws from 2010 are problematic. President-Elect Obama's proposal would set the applicable exclusion amount at $3.5 million and the top federal estate tax rates at 45% which many commentators believe is workable.