Monday night President Obama announced a tentative deal with Republicans to extend the Bush tax cuts for all taxpayers in exchange for a 13-month extension of unemployment benefits. This deal was reached just days after the Senate failed to pass two initiatives to permanently extend the Bush tax cuts for the middle class only.
In addition to extending the Bush tax cuts for all taxpayers for the next two years, this compromise includes much awaited estate tax reform. Some of the key elements of the deal are as follows:
Two Year Extension of Bush Tax Rates for all Taxpayers
If Congress failed to act, the tax rates would increase to pre-2011 levels beginning January 1,2011. The current agreement between the President and Republicans will extend the current tax rates through the end of 2012. The table below summarizes the difference in tax rates under the sunset provisions and the extension.
Difference between Sunset and Extension
|Tax Rate||EGTRRA Sunset||Extension of Current Rates|
|10%||$0 – $17,000|
|15%||$0 – $57,650||$17,001 – $69,000|
|25%||$69,001 – $139,350|
|28%||$57,651 – $139,350||$139,351 – $212,300|
|31%||$139,351 – $212,300|
|33%||$212,301 – $379,150|
|35%||$379,151 & above|
|36%||$212,301 – $379,150|
|39.6%||$379,151 & above|
Under the current agreement, taxes on qualified dividends will remain at 15% rather than increasing to ordinary income tax rates. Long-term capital gains rates will also remain at 15% rather than increasing to 20%.
Estate Tax Exemption of $5,000,000 and a Top Estate Tax Rate of 35%
This is perhaps the most surprising element of the agreement. Under the sunset provisions, the estate tax exemption will return to $1 million and the top estate tax rate would return to 55%. However, the current agreement between the President and the Republicans would increase the $1 million exemption to $5 million ($10 million per couple) and would lower the top tax rate from 55% to %35 through the end of 2012.
In 2013, the estate tax exemption will decrease to $1 million and the top estate tax rate will increase to 55% unless Congress intervenes beforehand. This perpetuates the uncertainty surrounding the estate tax and presents many challenges in estate planning during the next two years.
The agreement also includes various 2009 Extenders. The most anticipated being the option to transfer IRA assets to charities for taxpayers over 70 1/2. We will need to watch this closely as all Required Minimum Distributions (RMDs) must be taken by December 31,2010 to avoid penalty.
13 Month Extension of Unemployment Insurance
Under the current agreement, unemployment benefits would remain in effect through the end of 2011 for workers who have been unemployed for more than 26 weeks and less than 99 weeks. Without an extension, unemployment benefits for those unemployed more than 26 weeks would cease this month.
Social Security Tax Cut
The agreement includes a two percentage point decrease in social security tax for one year. The tax would decrease from 6.2% of wages to 4.2% of wages. This decrease only applies to the employee’s portion.
This agreement between the President and Republicans must pass through the House and Senate with the necessary votes before becoming a law. House and Senate leaders are noncommittal on the proposal as they continue to discuss it in closed caucus meetings today. Republican and Democratic leaders have said they believe a formalized agreement on the tax cuts is possible by the end of the week.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.
There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.