By Ken Little

Recent federal tax bill is mostly good news for seniors and older taxpayers, several local CPAs said. The bill, signed in December by President Obama, extends breaks put in place under former President George W. Bush. It represents “a substantial victory for middle-class families across the country,” Obama said when the time the bill was signed.

Wealthy taxpayers will also benefit.

The bill stopped taxes from automatically going up on Jan. 1. It remains in effect for two years.

Many older Americans continue working to make ends meet in the current economy. The $658 billion package includes a 2 percent reduction in the Social Security payroll tax.

Workers who pay Social Security payroll taxes will see them reduced to 4.2 percent from the current 6.2 percent. The maximum tax break would be a little over $2,000, and the cut would expire after one year.

“You have got to be working (to receive it), so it really kind of left us where we were in 2010. Most 55-plus people should see a lower tax than they otherwise would have,” said Thomas Riley, a tax partner at Testone Marshall & Dicenza LLP in Syracuse.

Art Pearson, principal at Burdick and Pearson, CPAs, in Oswego, said the tax bill is generally positive for all Americans, including those 55 and over.

“The tax rates are going to stay the same for at least two years,” Pearson said. “You will notice that your payroll taxes collected on Social Security taxes will be less.”

The estate tax provision in the Obama compromise package has received a lot of publicity, primarily for what is perceived to be breaks given to those in high income brackets.

Obama and Republicans struck a deal that reinstates the estate tax at 35 percent and to exempt estates worth as much as $5 million per individual.

“Most people are not going to pay the estate tax, but a lot of people got excited about it,” Riley said.

That’s on a federal level.

“New York state is a problem because our taxes are high and our estate tax kicks in at $1 million,” Riley said. “With proper planning, most people can save most of their money. You’re not going to see that many people in Central New York affected.”

Pearson said New York will likely “decouple” from the federal adjustments, “so for New York state, a $1 million tax exemption is still in place.”

The estate tax “allows portability between spouses,” Pearson said. “Although you have no federal estate tax, there is going to be an opportunity even if you passed away in 2010 to apply the estate tax at the 35 percent, $5 million level and by doing that the value of the assets will get a step up in basis,” Pearson said. “What the step up in basis does, it allows you to use your estate best value for when your heirs sell one day. Heirs will have less tax when they sell their assets.

“If you have a good estate plan in place, you’re able to shelter up to $10 million in estate taxes. Generally you have an exclusion of $5 million (per person),” he said.

The 2009 estate tax limit was $3.5 million. There was no federal estate tax in 2010, and if the provision had not been included in the federal tax package, rates would have reverted to 2001 levels — $1 million for an individual or $2 million for a couple.

‘It would have been the last year of favorable tax provisions at the federal level,” Pearson said.

Individual tax rates will remain intact for 2011. Another benefit of the tax package is that capital gains and qualified dividends will have “the favorable (15 percent) tax rates most taxpayers have enjoyed since 2001”, Pearson said.

“If they want to sell stocks or receive dividends they’ll enjoy the tax rate they have enjoyed for the past nine years,” he said.

For the upcoming tax year, things will remain pretty much as they were, Riley said.

“Now it’s kind of status quo. You have a lot of the same (practices) you did the year before,” he said.

Older Americans need to take a comprehensive look at their financial picture at tax time, Riley said.

“It all ties together. A lot of things don’t stand on their own,” he said.

Deductions are one area to look at.

“You would be quite surprised how many people don’t itemize,” he said. Many older Americans opt for short forms or electronic filing and don’t
take advantage of deductions they could use, he said.

Seniors need to reassess health care options, Riley added.

“They need to look at health care and things like that. Costs are going up,” Riley said. “A lot of people don’t understand how expensive health insurance is.”

Another word of advice:

“People need to look at their wills to make sure they are set up properly,” Riley said.

“There are a lot of things you need to take into account, but overall, I would say it’s status quo.”

The new law provides that each individual can die with $5 million in assets before they will be subject to estate tax

By David J. Zumpano

Congress and President Obama passed a new tax bill in the last week of December 2010. So, what does it mean to you?

In 2001, President Bush, with Congress, enacted massive tax changes that were set to expire on Dec. 31, 2010.

Literally, on the eve of the 2001 law expiring, President Obama and Congress extended many of the tax laws implemented by President Bush, and in several areas, even expanded them.

If the laws had reverted back to the 2001 levels on Jan. 1, 2011, the top income tax rate would have been 39.6 percent, rather than the current 35 percent, and capital gains could have been taxed as high as 28 percent, rather than the 15 percent maximum in the new law.

Perhaps, the greatest changes in the new law, however, related to estate taxes.

The new law provides that each individual can die with $5 million in assets before they will be subject to estate tax, and if subject to tax, it is at a 35 percent rate.

If the law had expired, the limit would have been only $1 million with a 55 percent maximum tax rate. In addition, the new law increased an individual’s lifetime gift exemption from $1 million to $5 million.

Essentially, each person can now give up to $5 million away in their lifetime without any gift tax consequence.

Perhaps, the most surprising element in the new law came with the portability of the estate tax to a surviving spouse. Prior to the new law, if one spouse died, he or she would’ve needed to create trusts at death, to utilize the $5 million exemption provided by the government, or it would’ve been lost.

Under the new law, the use of trusts are no longer required after death to preserve an exemption, but rather, a surviving spouse may elect to assume the unused credit of the deceased spouse. In essence, this may permit a surviving spouse to have up to $10 million of assets at their death, without having to pay an estate tax.

The new tax law virtually eliminates any worry of gift or estate taxes for 99.9 percent of Americans.

But beware: the new law passed in December 2010 is only effective until Dec. 31, 2012.

What happens after that date is anyone’s guess.

So, while you no longer have to worry about the tax law, be careful not to ignore the more relevant elements to planning, such as protection from a spouse’s remarriage, children’s creditors, divorce, and lawsuits, or even the threat of going into a nursing home.
Proper estate planning ensures all issues, including taxes, asset protection, Medicaid, and most importantly, your family, are provided for.

David J. Zumpano is an attorney and a certified public accountant (CPA). He operates Estate Planning Law Center. He can be reached at 793-3622.

Legislation approved under President Bush is about to expire. Does it mean we’ll have to pay more on estate taxes?

By David J. Zumpano

In 2001, President Bush signed a major tax legislation that was implemented over a 10-year period ending January 2011. Under the law, the estate tax exemption limit was increased (from $1 million to $3.5 million) for the period between 2001 and 2009. The law, however, also provides that on Jan. 1, 2011 the estate tax law reverts back to what it was in 2001.

We are rapidly coming upon Jan. 1, 2011 — will it revert to the 2001 levels?

One thing we know for certain is what the current law states.

On Jan. 1, 2011, the estate tax reverts back to the levels it was in 2001, providing for the individual exemption amount to fall to $1 million.

Estates in excess of that amount will be subject to a confiscatory 55 percent estate tax.

Interestingly, neither Democrats nor Republicans want the law to revert — but what will they do about it?

There have been many bills in Congress over the last 10 years to make permanent the law as it provided in 2009 and not revert back to the 2001 level. Most of the bills provide for an estate tax exemption somewhere between $3.5 million and $5 million at a maximum 35 to 45 percent tax rate after 2010.

The current political scene, however, assures no action will be taken on this matter until after the 2010 elections in November.

For those of us who live in New York, we also have to be aware of the New York estate tax, which applies to individuals with estates of $1 million. Oddly, while it provides for the $1 million exemption, if an individual dies with more than $1 million, they are subject to an estate tax from the first dollar, rather than just amount over $1 million.

Careful planning is essential to ensure you do not subject yourself to a New York estate tax unnecessarily.

It is also important to know the estate tax exemption is permitted to each individual. Married couples can double the exemption. Unfortunately, most married couples lose the exemption because of improper beneficiary-designations on the titling of their assets, to their spouse or owing them jointly. These types of accounts will act to eliminate the double exemption.

So, what will happen with the estate tax? Not certain, but this I know. It will be in a state of flux for the rest of the year and perhaps into 2011 or beyond.

It’s essential that your planning considers these laws now, and as they change, to ensure your family is not adversely impacted.

David J. Zumpano is an attorney and a certified public accountant (CPA). He operates Estate Planning Law Center. He can be reached at 793-3622.