If President Obama has his way in the ongoing budget discussions, the two year tax deal he made with Republicans last December will be just that: a two year deal. Under that compromise legislation, for 2011 and 2012, the maximum tax rate on capital gains and qualified dividends remained at 15% and the maximum rate on ordinary income remained at 35% . The estate, gift, and generation skipping taxes were restored beginning in 2011 (with a taxpayer option to apply the estate tax in 2010) with a maximum rate of 35% in effect for 2011 and 2012. The lifetime exemption for the estate, gift and generation skipping taxes is $5,000,000 and is portable between spouses in 2011 and 2012.
In his budget proposal released in February, the President would increase the capital gain and qualified dividend rate to 20% beginning in 2013. The maximum rate on ordinary income would increase from 35% to 39.6%. Beginning in 2012, new limitations would be placed on itemized deductions for upper income taxpayers.
The budget does not contain specific proposals for estate and gift tax rates and exemptions; however, the revenue forecast used assumes that after 2012, the maximum rate will go back to 45%. The lifetime exemption for the estate and generation skipping tax would be $3.5 million and for gift tax would be $1 million. The budget does propose making permanent the portability of the lifetime exemption between spouses.
There are several other proposals in the estate and gift tax area. There would be a new rule restricting the tax basis of an asset acquired from a decedent to the final estate tax value of that asset. There is no such rule currently and some taxpayers have later claimed higher values for income tax basis purposes than the value that had previously been shown on the estate tax return. Another proposal would further restrict taxpayers’ ability to obtain discounts for factors like minority interests and restricted transferability. GRATS would be required to have minimum terms of at least 10 years and could not be set up with remainder interests having zero value. Finally, trusts that are exempt from generation skipping taxes would only remain exempt for 90 years.