Congress will have only four weeks to work on bills concerning nuclear weapons, immigration, Don't Ask Don't Tell, the federal budget, and the sunset of the Bush tax cuts. The Senate, of course, will discuss none of these subjects on Monday, because the schedule calls for debate of the Food Safety Modernization Act. I'm sure that's a worthy subject, but it is obvious that finally resolving the tax issues is far more important at this point.
At this point it looks like Congress will not reach agreement on the tax issues, meaning that starting Jan. 1:
1. Most taxpayers will wind up in a higher income tax bracket.
2. Dividends will no longer be taxed at 15 percent; instead they will be taxed at the taxpayer's marginal rate, which could be as high as 39.6 percent for some taxpayers.
3. Capital gains taxes will go up from 15 percent to 20 percent.
4. And, of course, the estate tax will affect thousands of decedents whose estates are larger than $1 million.
We are not optimistic about the chances that the Congress will find a compromise on the estate tax issue. A House bill, H.R. 4154, has been sitting on the Senate calendar for the past 11 months and no action has been taken. That bill would restore the estate tax at its 2009 level, with a $3.5 million exemption and a 45 percent tax rate. For a married couple it would allow $7 million of the couple's assets to avoid the estate tax.
However, the Republicans want a $5 million exemption and a 35 percent tax rate for the estate tax. The Democrats are digging in at $3.5 million for the exemption and a 45 percent tax rate. Is there room for a compromise here? How about a $4.25 million exemption and a 40 percent tax rate? Is that too reasonable to be suggested inside the Beltway?
Whether it is reasonable or not, it looks like we are 37 days away from a $1 million exemption and a 55 percent tax rate. At that point the House will change leadership and there will be bills coming out of the House to correct this problem. Those bills will get a chilly reception in the Senate, and the few bills that get out of the Senate will probably get vetoed by the president.
In other words, once we get back to a $1 million exemption, don't expect any major changes until after the 2012 election, if then. That's right, we're going to be stuck with the $1 million exemption and 55 percent tax rate for at least two years. It will be good for the federal budget, bringing in an additional $250 billion per year, and it will be good for estate planning attorneys and CPAs, but it will be bad for the taxpayers.
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