What does the New Tax Law mean for New Jersey?

I wouldn’t have taken bets on it, but Washington has hammered out how our federal tax laws are going to look for the next 2 years. On the plus side, we know what taxes are going to look like in January 2011, which is a far better place to be than Monday of last week. On the downside, this does not represent thoughtful tax reform – instead, it is knee-jerk politicking with the intent to dump the tax issues in the voters' laps at the next election so no politician is "responsible" for having taxes go up.

The cost of this package? $858,000,000,000.00 added to the federal deficit- yeah, that's a big number. Oh, and "added to the federal deficit” really just means that we spent $858,000,000,000.00 that we don't have. What I'd like to see happen in the new year – an actual bi-partisan examination of how tax policy affects the economy, and a roadmap to create a balance between the amount that we are spending, and the amount of revenue being generated.

To get back to the new law, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRA") extends many tax cuts that were going to expire on December 31, 2010, as well as throws in some new tax laws. Some highlights:

  • The maximum federal income tax rate will remain at 35%. New Jersey income taxes are an additional maximum 8.97%
  • Married couples will continue to benefit from the 200% standard deduction
  • High income taxpayers will not be subject to phase-out of itemized deductions and personal exemptions for high-income taxpayers
  • Most key - "Patch" of alternative minimum tax exemption to keep rate with inflation (this is a law they should really make permanent)
  • Capital gains and dividends will continue to be taxed at 15%. New Jersey income taxes are an additional maximum 8.97%
  • The federal estate tax returns with a portable exemption of $5 million per person and a maximum tax rate of 35% (more to follow). New Jersey’s exemption rate continues to be $675,000 per person and is not portable.
  • The greatest opportunity is created in the increase of the gift tax exemption and generation skipping tax exemption to $5 million per person at a 35% maximum rate. New Jersey does not have a gift tax.
  • Extension of unemployment benefits for 13 months
  • Employees will benefit from a 2% reduction in Social Security withholding
  • Business owners can depreciate 100% of new business assets placed in service before January 1, 2012

My thanks to Sobel & Co for their excellent TRA summary, which I used as a resource.


Estate Tax Opponents Shift Strategy

The Huffington Post heralds "An Estate Tax Victory By Any Other Name".  Contributor Chuck Collins advises that the richest (billionaires, not mere millionaires) families in America have recently changed their strategy from calling for the death of the so-called "death tax" to the reducing the impact of the same.

The federal estate tax effects less than 2% of estates nationwide.  However, Collins reports that "Wealthy families, including 18 dynastic families such as heirs to the Mars candy family fortune, had spent millions in lobbying funds to save billions in future taxes."   Now, they have apparently changed this mission statement to their lobbyist not to "kill the death tax" but to mitigate its impact.

I understand how the estate tax seems categorically unfair.  However, it bears reminding that the estate tax stands in lieu of the capital gain tax when a person dies. When you die, you may have assets that have increased in value between when you bought them and when you died.  For example, you bought stock in Acme, Inc. at $10 a share and it is now $100 a share.  If you sell that stock, during your lifetime, you owe capital gains tax on the gain of $90.  

However, due to Section 1014 of the Internal Revenue Code, when you heirs sell that same inherited stock, their cost basis is $100 (the tax basis is "stepped-up" to the date of death value, and all that appreciation during your lifetime disappears, as does the governments opportunity to tax it.  

The cost for the the "magic wand'? - the existence of an estate tax that taxes your assets at death (assuming you have more than $3.5 million from a federal estate tax perspective).  The kicker is that capital gains tax rates are 15% presently, and estate tax rates 45%, so perhaps it is the rates that need to be looked at, not the existence of the tax.