Federal Estate and Gift Tax Alert
The Economic Growth and Tax Relief Reconciliation Act of 2001 repealed both the Federal Estate Tax and the Federal Generation Skipping Transfer Tax (GST) as of January 1, 2010. The taxes are scheduled to be reinstated effective January 1, 2011 at the 2001 rate and exemption level. The expiration of the estate and GST taxes at the end of 2009 is causing uncertainty for taxpayers and their advisers.   

There are currently several proposals in Congress to address this issue. Potential outcomes include: (1) extending the 2009 rates and exemption and making them retroactive to January 1, 2010; (2) reinstating the taxes at a lower rate and higher exemption; and (3) Congress does nothing and the taxes will be reinstated on January 1, 2011 at the 2001 levels.

The best course of action for clients at this time is to review estate planning documents and if necessary revise those that contain language referencing the portions of the Internal Revenue Code which are now in question. Most estate planners believed Congress would act before the end of 2009 and therefore did not include provisions reflecting the possibility of repeal in 2010. Revising documents now can ensure that your estate is distributed according to your wishes and prevent unintended consequences. 

We hope that Congress acts quickly to restore consistency in our estate tax laws.  If you have any questions, please do not hesitate to contact us. 

Federal Estate and Gift Tax Exemptions under current law are as follows:

The annual gift tax exclusion for 2010 remains unchanged from 2009 at $13,000.

Homebuyer Credit Extended and Liberalized
The Act extended the credit to the purchase of a principal residence by the taxpayer before May 1, 2010 and to purchases before July 1, 2010 by a taxpayer who enters into a written binding contract before May 1, 2010.  The credit is limited to the lesser of $8,000 or 10% of the purchase price.

The credit is now available to higher income taxpayers for purchases after November 6, 2009.  The credit phases out for individual taxpayers with modified adjusted gross income between $125,000 and $145,000 ($225,000 and $245,000 for joint filers) for the year of purchase. 

The Act also extended the credit to existing homeowners who are "long-time residents".  For purchases after November 6, 2009 any individual who has maintained the same principal residence for any 5-consecutive year period during the 8-year period ending on the date of the purchase of a subsequent principal residence is treated for purposes of the credit as a first-time homebuyer.  The maximum credit for these taxpayers is the lesser of $6,500 or 10% of the purchase price.

The Act did set a new limitation on the purchase price of the principal residence.  The credit cannot be claimed if the purchase price exceeds $800,000.

Five-Year Carryback of NOL's Extended and Expanded
The Act provides an election for most taxpayers to increase the carryback period for an applicable net operating loss (NOL) to 3, 4, or 5 years from 2 years.  An applicable NOL is defined as the taxpayer's NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.  The Act removes the limitation that the NOL must be generated by a small business.

The Act adds a new limitation to the amount of the NOL that can be carried back to the 5th tax year before the loss year.  The NOL carried back may not be more than 50% of the taxpayer's taxable income for that 5th preceding tax year determined without taking into account any NOL for the loss year or for any tax year after the loss year.

We hope this information is helpful.  If you have any questions regarding the above tax changes, please do not hesitate to contact us.