There’s a lot going on these days that’s keeping John E. Finnerty Jr., a tax principal at Lefowitz, Garfinkel, Champi & DeRienzo PC, and the rest of the CPA firm on their toes. Most of it has to do with the dire state of the economy and the change of administration in Washington, D.C. Finnerty answered five questions on those matters and their effects on taxes.
PBN: The federal estate tax exemption is supposed to rise from $2 million to $3.5 million in 2009, and then the tax is supposed to disappear in 2010 and return in 2011. What do you foresee happening to the estate tax in next few years, in light of the downturn in the economy? How about at the state level, where Gov. Donald L. Carcieri has expressed a desire to abolish it?
FINNERTY: Under existing law, you are correct in your assumption that the applicable exclusion amount or estate tax exemption for federal tax purposes has risen in 2009 to the $3.5 million amount. Assets in excess of the applicable exclusion amount are subject to a maximum federal estate tax rate of 45 percent. While current law provides for a repeal of the federal estate tax in 2010, it further provides for the reinstatement of the federal estate tax for 2011 and beyond with an applicable exclusion amount of only $1 million and a 55 percent maximum federal estate tax rate.
In regards to what may happen to the estate tax in the next few years, during the 18-month-long campaign season, President Barack Obama proposed freezing the applicable exclusion amount at $3.5 million, with the tax rate, for estates in excess of that amount, at 45 percent. The problem with this proposal is that it was made prior to the unfolding of the current economic crisis. For that reason, many estate-planning professionals fear that the government may be compelled to lower the applicable exclusion amount and likely raise the federal estate tax rate.
As far as Rhode Island is concerned, it is true that Governor Carcieri has expressed a desire to abolish the estate tax. However, again, given the current economic conditions and budgetary issues that the state is facing, the abolishment of the estate tax seems very unlikely. Additionally, while for federal tax purposes, the applicable exclusion amount for 2009 is $3.5 million, the corresponding exclusion for Rhode Island is only $675,000. Thus, there are many estates that may not be paying a federal estate tax, but may potentially be paying an estate tax to Rhode Island.
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PBN: How about the federal depreciation deduction – Section 179? In 2008, the maximum deduction allowed under the section was raised to $250,000, but I understand that it’s going to drop back to $133,000 for 2009. What is the likelihood that the government will instead maintain the $250,000 max to spur equipment purchases and the like by businesses? How are you advising your clients?
FINNERTY: To help small businesses quickly recover the cost of certain capital expenses, small businesses may elect to write-off the cost of qualifying expenditures in the year of acquisition in lieu of recovering these costs over time through depreciation. The Economic Stimulus Act of 2008 generously increased the limits of the Section 179 deduction for 2008. The previous limits were $125,000 for the deduction and the total amount of qualifying assets purchased or leased for the year had to be less then $500,000. The Economic Stimulus Act of 2008 increased the deduction limit to $250,000, and now the total qualifying assets purchased or leased needs to be less then $800,000.
The Economic Stimulus Act of 2008 was only meant to be a one-year increase. For tax years beginning in 2009, the maximum deduction is $133,000, with reductions to begin when more than $530,000 of qualifying property is placed in service.
On Jan. 16, the House Ways and Means Committee released a summary of the economic recovery package, H.R. 598 “The American Recovery and Reinvestment Act of 2009.” Included in this package is an extension of the enhanced Section 179 deduction ($250,000) for 2009. Obviously, this is only a proposal by Congress and may not become law.
We will continue to advise our clients that the current tax law allows for only a $133,000 current deduction. We will, of course, monitor any new legislation and advise our clients of any changes enacted in 2009 that would affect their tax situation.
PBN: With the change of administration in Washington and the uncertainty over how to restart the sputtering economy, there seem to a lot of things in tax law that are up in the air. Is this any different from previous years?
FINNERTY: As with any year, the potential for sweeping tax changes to be made is always a concern. However, given the economic conditions and the new administration in Washington, D.C., the likelihood for change is probably more apt to occur in 2009 and potentially in 2010.
We have had many discussions regarding what may happen to tax rates for ordinary income, dividends and for capital gains. We are also concerned about the extension of expiring tax provisions and the alternative minimum tax. More importantly, we are monitoring the proposed changes to evaluate who will bear the burden of the anticipated tax increases.
While 2009 is not per se different from other years, the expectation of more extensive changes makes our discussions with clients difficult. We may have discussions with our clients early in the year and put together a tax plan for the rest of the year and if during 2009 changes occur, we need to re-address our advice to see if it is still applicable or if there are other alternatives that we should be thinking about.
PBN: How does this affect the firm? How about how you advise your clients?
FINNERTY: As with all years, we need to be aware of any newly enacted legislation and have discussions with our clients as to its impact – whether beneficial or detrimental. The key in 2009 is frequent communication. We need to be in front of our clients discussing the impact of any newly enacted legislation and offering solutions and alternatives.
As many new proposals unfold, we will stay on top of these proposed changes and initially offer a broad-brush picture to our clients. We will then meet individually to discuss the impact on that client. We strive to provide our clients with as much timely information as possible so that they are able to make an informed decision about their tax strategy.
PBN: What concerns are your clients expressing?
FINNERTY: I think that there are a couple of items. One would be the uncertainty of what will happen with taxes in the near future and the second would be the effect of the current state of the economy on their own financial well-being.
Taxpayers do not like the uncertain tax future. If taxpayers know their situation, they can plan for it or plan around it. However, given the uncertainty of any tax changes, taxpayers do not know if their taxes will increase, stay the same or even decrease.
Obviously, the economy is on everyone’s mind. There is not a day that goes by without news of layoffs, bailouts, investor scams, or just the general state of the economy. Everyone has seen how the economy has affected their individual savings, their retirement savings, and the value of their real estate. These are unprecedented times and people are not sure of the total ramifications or even when there may be a turnaround.
