December 7, 2010

President Obama announced last night, December 6, 2010 a tentative agreement with Congressional Republicans for a temporary extension of the 2001 and 2003 Bush-era tax cuts.

If approved by the Senate and the House of Representatives:

• Current Income Tax rates would remain the same for two years for all taxpayers; 
• Estate Tax at a lower rate would be reinstated for  two years (supposedly with a top rate of 35% and a maximum exemption amount of $5 million);  and
• Benefits will continue to flow to the long-term unemployed while payroll taxes will be cut.

However, if not approved before December 31, 2010, it could have the following consequences:

• Personal Income Tax rates would rise with the top rate rising from 35% to 39.6% while the bottom rate will rise from 10% to 15% and the other brackets seeing increases of 3%.
• The highest rate for Estate Tax will top at 55% with Estate Tax exemption of US$1,000,000 per individual.
• In place of the step-up basis, the carryover basis rules will in general apply, requiring a beneficiary who inherits an asset to use the same basis as reported by the decedent. However there will still be an allowance for some transfers to qualify for a step-up in basis to fair market value.
• The gift tax regime will remain in place with a lifetime gift tax exemption of US$1,000,000 and a flat tax rate of 35% on taxable gifts.