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BHBM Tax Alert 09/25/2009

Friday, September 25, 2009

FEDERAL

Estate Tax Bills in Congress

There are several bills pending in Congress that will attempt to change the estate tax system.  Currently, the estate tax exemption amount is $3.5 million and there is a maximum tax rate of 45%.  In 2010, the estate tax exemption amount would disappear but would resurface in 2011 with the pre-2001 system, which means that the exemption amount for 2011 would be $1 million. The following bills are suggested alternatives pending in Congress:

H.R. 436 provides a $3.5 million exemption amount with a maximum tax rate of 45%.  There would also be a surcharge of 5% for estates over $10 million.

H.R. 498 provides a $5 million exemption amount that is phased in through 2015.  Specifically, the exemption amounts for the years until 2015 are as follows: 2010-$3.75 million; 2011-$4 million; 2012-$4.25 million; 2013-$4.5 million; 2014, $4.75 million. The maximum estate tax rate in this bill would be two times the net capital gains rate found in IRC §1(h)(1)(C). 

S. 722 provides an exemption amount of $3.5 million that would be indexed for inflation after 2010.  The maximum estate tax rate would remain at 45%. 

H.R. 1986 provides a $4 million exemption amount for the estates of all decedents dying after December 31, 2009.  This bill also provides a maximum estate tax rate of 40%.

H.R. 2023 provides a $2 million exemption amount that would be indexed for inflation after 2010.  This bill provides a tiered estate tax rate system with two rates depending upon the size of the estate, which would also be indexed for inflation; the lowest rate is 50% and the highest rate is 55%. 


Conversion of a Traditional IRA into a Roth IRA

Currently, in order to convert a Traditional IRA into a Roth IRA, a taxpayer must meet the modified adjusted gross income limits found in IRC §408A(c)(3)(B).  However, this threshold will disappear beginning on January 1, 2010 so that all taxpayers may convert their existing IRAs into Roth IRAs.  The conversion of a Traditional IRA into a Roth IRA causes the taxpayer to recognize the value of the converted IRA as income in the year of conversion. 

One benefit of a conversion from a Traditional IRA into a Roth IRA is that distributions are free of federal income tax if the IRA has been in existence for at least five years.      

STATE

Louisiana Net Capital Gains Deduction Approved

On July 9, 2009, Governor Jindal signed H.B. 106, which authorizes a deduction from Louisiana taxable income of “income from net capital gains, which shall be limited to gains recognized and treated for federal tax purposes as arising from the sale or exchange of an equity interest in or substantially all of the assets of a nonpublicly traded corporation, partnership, limited liability company, or other business organization commercially domiciled in this state.”

The treatment of items which are capital gains for federal income tax purposes, but which are taxed at ordinary tax rates (such as recapture items) are not specifically addressed under this bill.  However, a previous version of this bill defined net capital gains as income taxed at the federal capital gains tax rate.  This language has been removed from the final bill and we expect the Louisiana Department of Revenue to clarify this bill at some point in the near future.


Louisiana Tax Amnesty      
           
The Louisiana Tax Amnesty program is a voluntary program that extends for two months that allows certain taxpayers to pay the balance of the Louisiana tax due while paying no civil penalties and only 50% of the balance of the accrued interest charges.  The Louisiana Tax Amnesty program began on September 1, 2009 and will extend until October 31, 2009.  To participate in this program, the taxpayer must file an amnesty application to the appropriate address in California. 

We encourage everyone that will be participating in this program to file all amnesty applications by October 15.  This is not a firm deadline, but if you file by this date, then there will probably be a chance to fix any possible mistakes on the amnesty application.

To obtain a copy of the amnesty application and to review some frequently asked questions regarding the amnesty program, please click here.    


TECHNICAL CORRECTION

For those of you who attended our CPA Seminar, please note the following correction to the tax incentives outline: the GO Zone extension for the parishes found under Section 15(B)(i)(1) of our outline should state “placed in service prior to December 31, 2008" with the parishes found under Section 15(d)(i)(1) being placed in service before December 31, 2010 with only those expenses incurred prior to December 31, 2009 qualifying.  However, this will only apply to real property.  If the property qualifies under IRC §168(k), which generally requires that the property have a recovery period of 20 years or less or that it is qualified leasehold improvements then the bonus depreciation extends up to December 31, 2009 (this relief was not GO Zone relief, but was instead a part of the Stimulus Package)

If you would like to receive BHBM Email Tax Alerts to stay informed on the latest changes in tax law on the Federal and State level, please email Stacey Lala at slala@bhbmlaw.com.