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BlackStar Investments

Tax and Financial Services

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Biggest Tax Stories of 2011

Posted on December 23, 2011 at 11:57 AM
There was not a ton of tax news this year, due to a welcome lack of legislation. So for one year in a row, the Internal Revenue Code was not a constantly moving target. Thank you Congress. Still, there were two significant developments and one significant non-development. Here, in my opinion, are the three biggest tax stories for 2011.
1. No Grand Tax Compromise
Earlier this year, when it became obvious to even the most jaded observers that the federal debt load had reached and exceeded the point of extreme scariness, it looked as if "tax reform" combined with "spending cuts" might be combined in a "grand compromise." No such luck. When push came to shove, the Democrats and Republicans couldn't even agree on where to go to lunch, much less on big changes in tax policy. So the deficit reduction problem was punted to a "super committee" which then failed to reach a consensus. As a result, automatic spending cuts are supposed to kick in to the tune of about $1.2 trillion (a number that looks increasingly inadequate) over 10 years. There are no automatic tax increases in the super committee deal, and none may be needed -- because the so-called Bush tax cuts are scheduled to expire (again) at the end of 2012. If that is allowed to happen, massive tax increases will take effect in 2013.
2. Temporary Social Security Tax Cut
For 2011 only, the withholding rate for the employee's share of the Social Security tax was reduced from the usual 6.2% to only 4.2%. For self-employed individuals, the Social Security tax component of the self-employment tax was also reduced from the usual 12.4% to 10.4%. For 2011, the Social Security tax hit the first $106,800 of wages or self-employment income, so the maximum savings from the cut was $2,136 (2% x $106,800). A married couple can save as much as $4,272 (2% x $2,136). Anyone with wages and/or self-employment income benefits to some degree from this arrangement.
For 2012, there's still a good chance the Social Security tax reduction will be extended and maybe even increased to 3%. But there will apparently be a lot of political gamesmanship before that happens. (For 2012, the Social Security tax will hit the first $110,100 of wages and/or self-employment income.)
3. New Estate and Gift Tax Regime Takes Effect
Legislation enacted in 2010 established a favorable new federal estate and gift tax regime that took effect in 2011 and continues through 2012.
* For estates of individuals who died in 2011 or made gifts in 2011, there's a $5 million unified federal estate and gift tax exemption.
* For estates of individuals who die in 2012 or make gifts in 2012, there will be a $5.12 million unified exemption.
* The estate and gift tax rates are both a flat 35%.
* Married individuals who die in 2011 or 2012 can pass along their unused federal estate and gift tax exemptions to their surviving spouses. In other words, unused exemptions are "portable." The ability to effortlessly pass along unused exemptions to surviving spouses allows both spouses' exemptions to be utilized without having to set up trusts or engage in other tax planning maneuvers that were previously necessary.
* For heirs of decedents who die in 2011 and beyond, the familiar rule that allows the federal income tax basis of inherited capital-gain assets (such as real estate and stock) to be stepped up to reflect fair market value on the date of death was reinstated. With the restoration of the unlimited basis step-up rule, heirs won't owe any federal capital gains taxes on appreciation that occurs through the date of death -- as long as that date is in 2011 or later.
* All but one of these beneficial changes will expire at the end of 2012 unless Congress takes further action. The unified gift and estate tax exemption will fall back to a paltry $1 million, the maximum estate and tax rate will go up to a punitive 55%, and the portable exemption deal will die. The only taxpayer-friendly provision that will survive is the basis step-up rule for inherited capital gain assets (it's permanent, until Congress changes its mind).
Stay Tuned for the 2012 Action
As I said at the beginning of this article, there was only limited tax news this year, and we will probably not see any really big developments until after the 2012 election -- unless you consider an extension of the Social Security tax reduction a really big development. For next year, we already know what the biggest story will be. We just don't know the final outcome. Will the Bush tax cuts really be allowed to expire at the end of 2012 or will they be extended once again? Will the current estate and gift tax regime really be allowed to expire at the end of 2012 and be replaced by a harshly anti-taxpayer regime? The answers to these questions will almost certainly depend on how the election turns out. Whatever happens, I'll do my best to keep you informed.

Categories: Tax Topics

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