2011 tax changes mystify and amaze

At the end of 2010, President Obama made a deal with the Republican leadership in Congress to extend the so-called “Bush tax cuts.” That action came on the heels of reports on how to reduce the national debt and the deficit and was obviously at odds with the need to accomplish what those reports advocated.

The explanation was that other needed legislation would not pass without this “compromise” and the economy needed the stimulus that would be provided. And, what the heck, it would only add a trillion dollars to the national debt.

Throughout these “compromise” negotiations, allowing the expiration of the old rates variously was referred to as a “tax increase” or “Obama tax increase.” What got lost in the shuffle was that the Bush tax cuts in 2001 were passed on when there was a large federal surplus, and the Republican theory was that it should be returned to the people. There is no surplus now.

So what did Congress and president do? Among the components were
the following:
Current income tax rates remain for two years. Those rates have a top rate of 35 percent on ordinary income and 15 percent on qualified dividends and long-term capital gains. Employees and self-employed workers’ Social Security tax is reduced by 2 percent in 2011. For the next two years, there is a modest increase in the alternate minimum tax exemption amounts, without which many taxpayers would have owed alternate minimum tax for 2010.Some things that were not in the original Bush tax cut also were retained from 2009 tax legislation. A $1,000 child tax credit is extended, and rules expanding earned income credits for larger families and married couples are added. Higher education tax credits and partial refundability also were extended for two years.

Businesses can write off 100 percent of new equipment and machinery purchases for new equipment purchased through the end of 2011. That hopefully will spur spending on equipment designed to create jobs.

In addition, the debate and angst over the federal estate tax was addressed by the compromise. What the Congress and president did, however, was both a surprise and inadequate. It was a surprise because the compromise was a $5 million personal tax credit for each individual.

Thus, people dying in 2011 or 2012 will be able to have a $10 million estate not taxed if proper planning is done for a couple, and $5 million for an individual.

The inadequacy is that the new rate is effective only for 2011 and 2012. This does not allow for long-term planning, and estate planners will have to tell their clients something like, “So, Mr. Jones, your $8 million estate will not be taxed under this plan, but, unless Congress does something else, $6 million of it will be taxed in 2013 and thereafter.”

This is a very interesting position in which to put taxpayers and their advisers, and will renew the frustration that existed for the last decade.

Meanwhile, $1 trillion more will be added to the federal deficit and the new Congress has come to Washington, again promising to solve all our problems.

Welcome to 2011.*****In New Hampshire, meanwhile, Gov. John Lynch has begun his fourth term, facing a very different Legislature. Already, the grip of conservative Republicans can be seen with a number of actions and proposals that raised eyebrows.

Among them: A request to investigate whether Rep. Michael Brunelle should be removed from office for serving as Democratic Party executive director, since his advocacy for legislation is deemed advocating for a “cause” as its “advocate,” in violation of the state constitution. Allowing legislators to carry concealed weapons in the State House. Hiring or appointing extreme conservatives to legislative office. Considering proposals like one to prohibit spending on public television, a long-standing investment by the state and a topic better left for the budget. Introduction of many bills on social issues, when leadership claims the budget and fiscal issues should be the focus.Hold on to your hats – it’s only just begun at the State House.

Brad Cook is a shareholder in the Manchester law firm of Sheehan Phinney Bass + Green and heads its government relations and estate planning groups. He also serves as secretary of the Business and Industry Association of New Hampshire.