If you have a big estate, die or give it away by January 1

Income taxes for everyone are not the only taxes that will jump up, should we jump off the fiscal cliff.  The estate and gift taxes will also soar dramatically. George Will is sardonic about it:

If you have worked hard for five decades, made pots of money and now want to squander it all in Las Vegas on wine, women and baccarat, go ahead. If, however, you harbor the antisocial desire — stigmatized as such by America’s judgmental tax code — to bequeath your wealth to your children, this would be an excellent month to die. Absent a congressional fix before Jan. 1, the death tax, which is 35 percent on estates above $5 million, reverts to 55 percent on those above $1 million.

via George F. Will: Fixing the tax code at the cliff’s edge – The Washington Post.

Rather than dying, many wealthy folks are giving their money away to their heirs, something else that will be heavily taxed after January 1.  From CNN Money:

Currently gifts and estates of up to $5.12 million are exempt from taxes, but as part of the fiscal cliff, any portion of a bequest that exceeds $1 million will be taxed next year — and at a 55% rate (currently, the rate is 35%). That will kick in unless Congress and the president agree to extend the current exemption or agree on a new one. Many older Americans are not waiting to see if that happens.

“It’s crazy,” said Richard Behrendt, Director of Estate Planning for Baird’s Private Wealth Management. “I bet more wealth is transferred this year than in the past 10 years combined.”
Jonathan Blattmachr, a principal of Eagle River Advisors in New York who has lectured groups of estate planners about the expiring exemption, said the amount given away in 2012 will be three or four times that of any other year.

The drop to a $1 million exemption means that the tax bill on gifts or estates of $5.12 million will go from zero this year to $2.266 million next year, according to Blattmachr.

What do you think about the estate tax?  One strain of puritanism has always disapproved of the “idle rich,” such as those trust fund kids on Lifestyles of the Rich and Famous jetting to Monaco and other of the world’s playgrounds.  The thought is, people should earn their wealth by hard work, not just live off of the hard work of their forebears.

Then again, inheritance is related to the unity of the family across generations.  Also, those with inherited wealth are not necessarily “idle,” since they usually have to keep the family business in good working order.

The inheritance tax is often devastating to farmers and owners of small businesses.  Farmers are often cash poor, but land rich.  That is, the soaring price of land makes them wealthy on paper, in terms of assets, but they don’t necessarily have much actual money.  Frequently, when the landowner dies, the farm has to be sold to pay the estate taxes.  The heirs don’t have that kind of money even if they want to continue the family farm.  The same can hold true for small businesses, which often have to be dissolved upon the death of the owner when the heirs can’t come up with the cash to pay the inheritance tax.

Surprise in Obamacare

Obamacare was passed so quickly that, admittedly, lawmakers did not have time to so much as read the multi-volume bill.  Hardly anyone, opponent or proponent, knows everything that Affordable Health Care law will do.  So as it is being implemented over the next two years, we will probably keep getting surprises.  Here is the latest, from the Associated Press:

Your medical plan is facing an unexpected expense, so you probably are, too. It’s a new, $63-per-head fee to cushion the cost of covering people with pre-existing conditions under President Barack Obama’s health care overhaul.

The charge, buried in a recent regulation, works out to tens of millions of dollars for the largest companies, employers say. Most of that is likely to be passed on to workers.

Employee benefits lawyer Chantel Sheaks calls it a “sleeper issue” with significant financial consequences, particularly for large employers.

“Especially at a time when we are facing economic uncertainty, [companies will] be hit with a multi-million dollar assessment without getting anything back for it,” said Sheaks, a principal at Buck Consultants, a Xerox subsidiary.

Based on figures provided in the regulation, employer and individual health plans covering an estimated 190 million Americans could owe the per-person fee.

The Obama administration says it is a temporary assessment levied for three years starting in 2014, designed to raise $25 billion. It starts at $63 and then declines.

Most of the money will go into a fund administered by the Health and Human Services Department. It will be used to cushion health insurance companies from the initial hard-to-predict costs of covering uninsured people with medical problems. Under the law, insurers will be forbidden from turning away the sick as of Jan. 1, 2014.

via Surprise: New Insurance Fee in Health Care Reform Law – DailyFinance.

Yes, it’s nice that pre-existing conditions will be covered.  Yet another thing we don’t know (“hard-to-predict”) is how much this will cost.  Normally, businesses–and especially insurance companies with their actuarial charts and calculations–would need to have those figures.  I doubt that $63 dollars per insured person would come anywhere near paying for the nation’s pre-existing conditions.  But at least something is budgeted for it.  Still, this amounts to a tax on everyone with health insurance, whether paid by the company or the insured.  I believe we were told that taxes would only go up for the wealthy.

HT:  Jackie

Short sellers’ fiscal cliff

The Bush tax cuts aren’t the only measures that expire on New Year’s Day.  So will the Mortgage Forgiveness Debt Relief Act of 2007.  Without that law, homeowners who have negotiated a short sale–that is, have part of their mortgages forgiven by the lender because they are so far underwater when they sell their home–will have to count the amount chopped off their mortgage as income for tax purposes.

Say a person owes $200,000 on his house but it’s only worth in today’s market for $100,000.  If the mortgage is held by the federally regulated lender Fannie Mae or Freddie Mac, there is a federal program that makes it possible for the underwater amount to be forgiven when the home is sold at market value.  So in a short sale, the person might be able to sell the home for $100,000 but be clear of the mortgage.  But after New Year’s Day, he will have to declare the $100,000 that Fannie Mae wrote off as if it were money that he actually received.  And then pay taxes on it!

Various bipartisan bills have been proposed to extend the Mortgage Forgiveness Debt Relief Act, but no votes are scheduled, and it isn’t part of the package that either side is proposing in the fiscal cliff negotiations.

 

via Short sellers may be hit with big income tax bills if Washington doesn’t act – The Washington Post.

Cutting charitable deductions

The Republican proposal to step away from the fiscal cliff is to raise revenue by cutting tax deductions while also lowering overall tax rates.  Democrats would keep rates higher for those who make over $250,000, and probably cap their tax deductions at $50,000.   So it looks like we have some agreement from both sides and that deductions for home mortgages, state taxes, and charitable giving will be cut, if not cut out entirely.  From Ezra Klein:

“Base-broadening, rate-lowering tax reform.” It sounds so good, right? But what if you call it what it really is? Charity-destroying, home-shrinking, state-burdening tax reform.

Doesn’t sound as good, does it?

But that’s really what we’re talking about. The term ”base-broadening, rate-lowering tax reform” has the advantage of vagueness: No one knows what it means. But the practical definition, at least the one that’s emerging in the ongoing “fiscal cliff” negotiations, is tax reform that limits itemized deductions among high-income taxpayers. And as former OMB director Peter Orszag points out, 90 percent of the value of those deductions comes from just three categories: “taxes paid (mostly state and local taxes), home-mortgage interest and charitable contributions.”

So when we say “base-broading, rate-lowering tax reform,” here’s what we’re really saying: Tax reform that’s paid for by cutting tax breaks for charities, homes, and state and local taxes.

Most economists will tell you that cutting the home-mortgage interest deduction, particularly for high-income taxpayers, is a good idea. There’s no real reason the tax code should be subsidizing McMansions. But cutting the break for charities is more complicated. As Orszag writes:

In 2009, households with incomes of more than $200,000 claimed almost $60 billion in charitable deductions — or about 20 percent of total charitable giving in the U.S. that year. Households with incomes of more than $10 million claimed an average of $1.75 million each in charitable donations in 2009, and they accounted for roughly 5 percent of all giving.

Charitable giving reacts to tax incentives, and in response to any limits on deductions it could even fall by about the same amount as the increase in the tax bill, according to John List of the University of Chicago, who recently reviewed the literature on this subject. Other studies have suggested an effect about half as large. Even that smaller estimate, though, suggests that limiting deductions to $50,000 a year could easily reduce giving by tens of billions of dollars.

via The reality of tax reform: Less charity, smaller homes, higher state taxes.

As Klein says, “limiting itemized deductions in order to raise revenues is a tax increase.”  So the Republican plan to eliminate or cut back on these deductions as a way to raise revenue is a tax increase, even if other rates are lowered.

People complain about “the rich,” but whenever there is a capital campaign for a museum, a college, an arts group, a charity, or a church, the wealthy are wooed and generally come up with most of the money.  Conservatives want “the private sector” instead of the government to bear more of the responsibility to help the poor, support the arts, and do other good works.  That means those worthy causes would need the support of wealthy donors.  Do you think that donors would be as generous as they are without the incentive of a large tax deduction?   I am convinced many of them would, but I worry about the practical effect on non-profit organizations (which incorporate for that status precisely so they can become tax  deductible).

What impact do you think cutting deductions for charitable giving might have on churches?  Specifically, on your congregation?  Probably most of your members come nowhere near the high-income level that would trigger the limits.  And yet a total limit of $50,000–including home mortgage, state taxes, charitable giving, and everything else–would hit people who don’t consider themselves all that wealthy.  [Tote up how much you deducted last year.]   And yet, very often a big chunk of a congregation’s revenue comes from a few families.  Again, one would hope that they give because the Lord loves a cheerful giver, because they believe in tithing, because they see themselves as stewards of the Lord’s gifts, etc., etc.  But a tax deduction is surely an incentive to generosity.  What would happen if all deductions for giving to the church were eliminated for everybody?

Perhaps this would become liberating in the long run.  No more would churches or other organizations have to operate under the regulations for non-profits.  They could express political opinions and endorse candidates without  the threat of losing their tax-exempt status.

At any rate, we need to consider the consequences–including especially the unintended consequences–of these proposed changes.  (And remember, these ideas aren’t coming primarily from liberals but from Republicans.)

Each party’s wrong ideas on taxes

As our lawmakers try to prevent us from falling off the “fiscal cliff” when the Bush tax cuts expire with the new year and mandatory federal reductions click in, Matt Miller argues that BOTH Republicans AND Democrats are laboring under two wrong ideas when it comes to taxes.

Republicans believe our fiscal woes can be solved by cutting taxes.  And Democrats believe our fiscal problems can be solved by raising taxes on the rich.  Miller tries to show why neither will work and how such ideological blinders will prevent effective solutions.

See Matt Miller: Dead ideas on taxes – The Washington Post.

Perhaps it isn’t that one side is right and the other wrong, or that both are partially right, but that both are wrong!  Where does that leave us?

If this is true, does anyone have any viable suggestions for putting our financial house in order?

 

Cliff diving

On New Year’s Day, the Bush-era tax cuts will expire and mandatory cuts in government spending will go into effect, a double-whammy to the economy that is being called “the fiscal cliff.”  Republicans do not want the tax increases and Democrats do not want the spending cuts.  So Congress is negotiating with the President about compromises, reforms, and trade-offs, all in an effort to avoid what nobody wants, the country going off the cliff.

But might falling off the fiscal cliff, in the long run, be the best solution, despite the horrible short-term consequences?  Under that scenario, taxes would rise dramatically (giving the government more revenue, the Democrats’ dream) but also government expenditures would be cut dramatically (resulting in a smaller government, the Republicans’ dream).  The combination of higher revenues plus lower expenditures would solve the deficit.

Isn’t this a true bi-partisan solution?  Don’t we as a nation need to take our bitter medicine before we can get better?  Other countries, such as Great Britain, have gone through austerity programs as a necessary step to fiscal health.  Could we Americans handle austerity?

(I am not necessarily advocating this, simply proposing for now a mental experiment.  Some of you suggested this in yesterday’s discussion of “Breaking Pledges,” but it’s worth discussing in its own right.)


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