This chant is usually reserved for holiday cheer but estate attorneys and financial advisors throughout the land are singing this song in praise of President Obama and the Republican compromise proposal to raise the estate tax exemption to $5 million ($10 million for couples) with a maximum 35% tax rate on the balance. This is the equivalent of a full exemption for the vast majority of Americans. Had no compromise been offered, the estate tax exemption was set to drop to $1 million exposing millions of middle class Americans to a maximum of 55% taxes on a portion of their estate. That’s the good news. The bad news is that these new rules are effective only for tax years 2011 and 2012. Beyond that, we don’t know what the rules will be which continues to create uncertainty and makes long-term planning difficult.
In addition to revisions in the estate tax rules, the compromise plan will extend the Bush tax cuts for all taxpayers for a period of two years. This is great news for millions of retirees who depend on stock dividends for a portion of their retirement income. This keeps dividends taxed at the 15% federal rate rather than ordinary income which could be as high as 35%.
One of the biggest surprises in the compromise proposal is a one-year reduction in the payroll tax of 2%. If you earn $50,000, this means you’ll see an additional $1,000 in your paycheck. The payroll tax maxes out at $106,800 which would produce savings of $2,136 for every worker earning that amount or more.
Businesses will be allowed to immediately write off certain equipment purchases rather than deducting the costs over a number of years. This acceleration of tax deduction will encourage businesses, who have been postponing purchases, to buy equipment over the next two years.
What this means for the economy. The goal of the compromise measure is to further stimulate the economy which has been marred at anemic growth levels for a near record number of months. You know, this just might work. Many companies have been holding back due to uncertainty regarding taxes and regulations. Now they have a much better understanding of the playing field.
What this means for the stock market. The compromise measure should prove positive for the stock market. Both public and private corporations have ‘leaned-out’ their organizations to the point that an uptick in revenue should quickly drive up profits.
What this means for you. With the new $5 million exemption, many wills will direct all of the first spouse’s assets into a family trust and nothing outright to the surviving spouse. Use this as an opportunity to review your estate plan. Decide now what you’ll do with your payroll tax savings. Suggestions include paying on high interest debts such as credit cards; building an emergency reserve or starting an investment program. Now is a good time to review your investments and consider increasing your allocation to stocks.
The final bill must be hammered out in committee and passed by both houses but for now, all I can say is ‘Halleluiah!’