It’s not new, but it’s getting attention again: a proposed federal tax on every securities (stock and bond) transaction is being pushed by prominent members of Congress.
The proponents of this tax say it is intended to discourage high-frequency trading and won’t hurt the middle class. Since many, many middle class families have retirement accounts that are invested in stocks and bonds, either directly or through mutual funds, I have some questions:
Is the reinvestment of dividends inside retirement accounts going to be subject to the tax? If so, then middle class people are going to pay the tax.
Are transactions in U.S. Treasury securities going to be subject to the tax? If so, retirees who invest in those bonds will pay the tax. If not, that will skew the markets because Treasury securities will have a cost advantage.
I could think of more questions, but you get the idea. The simplistic notion that a tax on securities transactions will only hit fat cats and day traders is a lie, designed to gin up support for the tax among those who won’t think about how it will actually affect lots of people.
GOOD NEWS ABOUT THE FEDERAL ESTATE AND GIFT TAX IF YOU PLAN ON MAKING SUBSTANTIAL GIFTS BETWEEN NOW AND THE END OF 2025
The basic exclusion amount for the federal estate and gift tax was increased from $5 million to $10 million by the 2017 Tax Cuts and Jobs Act. That amount will increase with inflation (it’s $11.18 million for 2018) through 2025, but it will go back down to $5 million in 2026, with adjustments for inflation.
So what happens if you make taxable gifts totaling, say, $9 million between 2018 and 2025, when the exclusion amount is over $10 million, then die in 2026, when the exclusion has reverted to $5 million? Will the estate tax apply to the gifts you made between 2018 and 2025 in excess of $5 million? That’s a possibility because the estate and gift taxes are calculated using a unified schedule, and you get only one basic exclusion amount. That means you could get hit with a tax of 40% on $4 million worth of gifts that you thought were not taxable because of the higher exclusion amount. That’s a lot of tax.
The IRS has answered the question: no, if you die in 2026 or later, the estate tax will not apply to gifts you made in excess of $5 million between 2018 and 2025. The IRS made this announcement in a news release issued on November 20, IR-2018-229.
Via TaxProf Blog.
ANOTHER SENATE PROPOSAL THAT WOULD RAISE THE ESTATE TAX, BUT THIS TIME TO DIRECTLY FUND A NEW ENTITLEMENT
A U.S. Senator recently announced a plan that would give each new American baby a savings account of $1,000. Each of those children who is in a family with income under certain limits would receive an additional deposit to his or her account each year. The amount of those deposits would be progressively smaller as the family income increases.
The account would not be accessible until the child reaches age 18, and then would only be available for certain purposes, such as home ownership and higher education. Sorry kids, no Corvette at age 18 (although I haven’t seen any explanation of how the limitations on the use of the account would be enforced).
The distinguishing characteristic of this proposal is that funds for a direct benefit to one group of taxpayers would come solely from a tax on another group of taxpayers. The funds for the proposed accounts would come from an increase in the estate tax, according to the proposal.
Senators have already floated one proposal this year for increasing the estate tax, but this proposal is qualitatively different. Has the federal government ever taxed one group to fund a direct benefit to another group? I could be wrong, but I don’t think so.
IF A WAY TO AVOID TAX HAS BEEN “BLESSED” BY THE COURTS OR THE IRS, THEN WHO, EXACTLY, IS BEING “TRICKED?”
A superficial treatment is better than none at all, but an article I read on Fox Business really didn’t tell me much of any substance, even though it was loaded with quotes from authoritative-sounding lawyers.
Oh, the subject was valuation discounts for family limited partnership interests. Apparently, the IRS has proposed new regulations that would narrow the circumstances in which the IRS will allow those discounts to be applied.
Those valuation discounts are, as the Fox Business article indicates, a method to reduce the value of, and hence the estate tax on the transfer of, family limited partnership interests when an owner dies. It’s not a new idea.
STRANGE THAT I SAW NO MENTION WHATSOEVER OF THIS WHEN IT WAS ANNOUNCED: SENATE DEMOCRATS HAVE PROPOSED AN ESTATE TAX INCREASE
I didn’t learn about it until this morning when I read the estate planning update that I receive weekly from Thomson Reuters/RIA. According to that update, Senator Schumer introduced on March 7 “a $1 trillion infrastructure proposal, to be financed by tax increases, including, among other things, elimination of the increased estate tax exemption under the Tax Cuts and Jobs Act of 2017."
The update from Thomson Reuters/RIA links to a subscription only service, but I did find a story about it that elaborates on the proposed tax increases, which would apparently reverse many of the cuts that were just enacted by the Tax Cuts and Jobs Act.
WHY IS THE SECTION OF THE IRS WEBSITE ABOUT ESTATE AND GIFT TAXES UNDER THE HEADING “SMALL BUSINESS AND SELF-EMPLOYED?”
Businesses don’t pay estate and gift taxes, nor do they file estate tax or gift tax returns. Individuals pay estate and gift taxes and file estate tax returns (Form 706) and gift tax returns (Form 709). So why is the section of the IRS website about estate and gift taxes under the heading “Small Business and Self-Employed,” where no one who knows those basic facts is going to think to look? Is it because the IRS thinks that most taxpayers have the (mistaken) impression that only business owners need to be concerned about estate and gift taxes?
Most government agency web sites are poorly designed, but this is a particularly egregious example.
That’s what the IRS claimed, although they apparently settled for a lesser amount in determining the tax due on the singer’s estate.
I have written about this type of situation before. This commentator brings up something I hadn’t really thought about: doesn’t valuing the right of publicity owned by the estate of a deceased celebrity assume that the estate or the beneficiaries of the estate are going to exploit that right? What if they don’t intend to, or they even agree that they won’t?
The right of publicity isn’t like a Picasso painting, that has value whether the beneficiaries plan to sell it or not. The fact that they could market Whitney Houston’s likeness, or her name, doesn’t mean they will, and if they don’t, it’s not worth anything.
I suppose if the estate has memorabilia (tangible items) containing her likeness, those items have value, but the IRS is talking about the right to something intangible and putting a value on it. Even if you don’t think that’s unfair, putting a value on it (like $11.7 million) seems like it would have to be awfully subjective.
Continuing my series of posts on the changes to the federal tax code under the recently passed Tax Cuts and Jobs Act, the biggest change for individual taxpayers is, in my opinion, the increase of the standard deduction from $6350 in 2017 to $12,000 in 2018 for single filers, and from $12,700 in 2017 to $24,000 in 2018 for married filing jointly. The effect of that increase will be to reduce the tax liability of taxpayers who use the standard deduction instead of itemizing deductions, which is a large percentage of all taxpayers.
The large increase in the standard deduction will also have the effect of reducing, perhaps dramatically, the number of taxpayers who itemize their deductions. If your itemized deductions were more than the old standard deduction, but are now going to be less than the new standard deduction, you won’t have to itemize anymore. That’s going to not only reduce your tax liability, it’s also going to simplify the preparation of your return.
I have seen some commentaries suggesting that the new legislation doesn’t benefit lower-income taxpayers. I just don’t see how that can be so. Most lower income taxpayers (probably the vast majority) take the standard deduction. With the standard deduction nearly doubling for both single taxpayers and married taxpayers filing jointly, the result would have to be a reduction in tax in almost every case. Am I missing something?
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