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Monday, April 22, 2013

Major Changes to Tax Law in New Budget Proposal

Recently, President Obama announced his proposed budget for 2014.  Included in the budget are some major changes to the recently enacted "permanent" estate tax exemption laws.  If you recall, a few short months ago, a fiscal cliff deal was enacted that provided for a $5,000,000 exemption from the federal estate and gift tax (indexed for inflation).

Among the recommendations in the proposed budget include a return to a federal estate and gift tax exemption of $3,500,000.   This exemption amount would not be indexed for inflation.  There is also a recommendation to increase the tax rate on estates over the exemption threshhold from 40% to 45%.

Furthermore, the proposed budget recommends certain changes that would curtail the use of many popular estate planning options (particuarly Grantor Trusts and Dynasty Trusts). In particular, there would be restrictions on the ability to do a technique known as a short-term GRAT, and trusts longer than 90 years would be subject to a generation skipping-transfer tax again.

Other major changes include a cap on tax deferred retirement contributions, reducing future Social Security benefits by recalculating benefits under a chained CPI formula, a minimum alternate tax of 30% on households earning more than $1,000,000 per year, and capping itemized deductions at 28%.

It is unlikely that most of these changes will ever go into affect and is more likely an opening salvo in a negotiation strategy.  However, it does provide insight as to the types of taxes the President wants raise and the planning options that are in jeopardy.