Thursday, December 23, 2010

Tax Refunds not countable for Public Assistance

Little known provision is part of new Tax Relief Act

By Jeffrey A. Marshall, CELA*

The Tax Relief Act of 2010 includes a provision that requires that tax refunds received in 2011 and 2012 are to be disregarded for 12 months for purposes of determining eligibility for federally funded assistance programs like Medicaid or SSI.  

This important new provision is found in Section 728 of the Tax Relief Act.  It reads:  

(a) In General- Subchapter A of chapter 65 is amended by adding at the end the following new section:
`(a) In General- Notwithstanding any other provision of law, any refund (or advance payment with respect to a refundable credit) made to any individual under this title shall not be taken into account as income, and shall not be taken into account as resources for a period of 12 months from receipt, for purposes of determining the eligibility of such individual (or any other individual) for benefits or assistance (or the amount or extent of benefits or assistance) under any Federal program or under any State or local program financed in whole or in part with Federal funds.
`(b) Termination- Subsection (a) shall not apply to any amount received after December 31, 2012.'.
(b) Clerical Amendment- The table of sections for such subchapter is amended by adding at the end the following new item:
`Sec. 6409. Refunds disregarded in the administration of Federal programs and federally assisted programs.'.
(c) Effective Date- The amendments made by this section shall apply to amounts received after December 31, 2009.

The Congressional Joint Committee on Taxation’s explanation of this provision is as follows:

“Under this provision, any tax refund (or advance payment with respect to a refundable credit) received by an individual after December 31, 2009 begins a period of 12 months during which such refund may not be taken into account as a resource for purposes of determining the eligibility of such individual (or any other individual) for benefits or assistance (or the amount or extent of benefits or assistance) under any Federal program or under any State or local program financed in whole or in part with Federal funds. The provision terminates on December 31, 2012.”

Thanks to New York attorney Steve Silverberg for initially pointing out this interesting aspect of the new tax law. 

Update: On February 2, 2011, CMS published an informational bulletin as guidance to state Medicaid agencies on how to administer Section 728's requirement to disregard federal tax refunds or advance payments.

Sunday, December 19, 2010

Portability Provision of Estate Tax law may be "Wolf in Sheep's Clothing"

The New Estate Tax Law May Create Complications for Middle Class Married Couples 

By Jeffrey A. Marshall, CELA*

The recently enacted Tax Relief Act of 2010 brings back the federal estate tax with a whimper not a bang. But one provision, intended to help married couples, may result in new tax complexities and expense for those of even very modest wealth.

Under the new rules, individuals who die in 2011 or 2012 will have an exemption amount of $5 million dollars (reduced if they made large gifts during lifetime). If their taxable estate does not consume the entire $5 million exemption, the unused portion can be passed on to their surviving spouse. However, the unused exemption amount is available to the surviving spouse only if an election is made and the amount is calculated on a timely filed estate tax return of the deceased spouse. This estate tax return must be filed to pass on the unused exemption even if no return is otherwise required.  

In its December 10th technical explanation of the provisions of the law, the Congressional Joint Committee on Taxation gives the following example of how this “portability” provision will work:  
“Example 1.−Assume that Husband 1 dies in 2011, having made taxable transfers of $3 million and having no taxable estate. An election is made on Husband 1's estate tax return to permit Wife to use Husband 1's deceased spousal unused exclusion amount. As of Husband 1's death, Wife has made no taxable gifts. Thereafter, Wife's applicable exclusion amount is $7 million (her $5 million basic exclusion amount plus $2 million deceased spousal unused exclusion amount from Husband 1), which she may use for lifetime gifts or for transfers at death.”

In the Joint Committee example, it is pretty obvious that the relatively wealthy surviving spouse should hire a lawyer to prepare a federal estate tax return for her deceased husband. At a 35% tax rate, the unused $2 million dollar exemption could someday be worth $700,000 to her heirs.

But doesn’t this same logic hold true in the situation of a married couple with a much more modest net worth? Who knows what the future holds for the surviving spouse.

Assume that you are the lawyer meeting with a surviving spouse soon after the death of her husband.  The deceased had an “I love you” estate plan which leaves everything to his wife.  The value of his estate, for federal estate tax purposes, is $400,000. There is no federal (or state) tax and there is no requirement that a federal estate tax return be filed.  

But there is a $5 million dollar unused exemption that can be passed on to the surviving spouse – IF your client is willing to go to the hassle and expense of having an estate tax return prepared and filed. As the lawyer, how can you not suggest the filing of estate return to calculate the unused exclusion and elect to pass it on? How can you guarantee that the unused exclusion will not someday be incredibly valuable to your client’s children or other heirs?   At a 35% tax rate, an unused $5 million exclusion could someday be worth as much as $1.75 million dollars.

Note that the more modest the estate of the deceased spouse, the more potentially valuable the unused exemption. 

In my area of Pennsylvania, new technology has recently allowed for development of the gas resources of the Marcellus Shale. Mountain land that would have sold for under $1,000 an acre 10 years ago is now worth ten to twenty times as much.  A small farm or hunting land worth much less than $1 million 10 years ago may now be worth $10 million or more. The lesson is clear: surviving spouses can acquire unanticipated wealth.  

As a lawyer, I don’t want to find myself sitting across the table from my client’s children someday trying to explain why a million dollars in avoidable federal estate taxes is due because mom didn’t file an estate tax return when dad died. I’m not sure I would feel that much better even if I had some kind of a waiver signed by mom.

So, it seems to me that the portability provision in Title III of the new Tax Relief Act may be the proverbial wolf in sheep’s clothing.  It may create a lot of additional work for lawyers, and expense for our widowed estate administration clients of only modest net worth. 

Update: In September 2011, the IRS issued Notice 2011-82 Guidance on Electing Portability of Deceased Spousal Unused Exclusion Amount.

See also:

IRS publishes new Estate Tax Return Form (706) and Instructions.

Estate and Gift Tax Portability Law Creates some Unconventional Planning Opportunities 

*Certified as an Elder Law Attorney by the National Elder Law Foundation under authorization of the Pennsylvania Supreme Court

Friday, December 17, 2010

Congress passes Tax Compromise Bill - including Temporary Estate Tax

 Late Thursday (December 16th), the US House passed the Obama/Republican Tax Compromise measure on a vote of 277 to 148. 112 Democrats and 36 Republicans voted "no." The bill passed after an effort by House liberals to modify the estate tax provisions failed by a vote of 194 to 233. The Senate had overwhelmingly approved the bill earlier in the week by a vote of 81 to 19.

President Obama signed the legislation on December 17, 2010. The bill (H.R.4583) has now become law the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" Hopefully, we will end up calling it something simpler, like the "Tax Relief Act of 2010" (TRA 2010).

The generous (but temporary) new federal estate rules are retroactive to January 1, 2010, at the option of the taxpayer. The gift tax rules are effective January 1, 2011. The Act also includes an extension of the Bush era income tax rates and numerous other provisions desired by progressives and/or intended to stimulate the economy. The cost is estimated at $858 billion.

For more information see the Washington Post article "Congress passes extension of Bush-era tax cuts."

The law as enacted in available on the website of the Government Printing Office:

The text of the law, including hyperlinks to sections is available through Thomas:


Thursday, December 16, 2010

Senate approves estate tax provisions for 2011 and 2012

On December 15th, the US Senate passed Senate Amendment 4753 to H.R. 4853, “The Middle Class Tax Relief Act of 2010.”  The vote was 81-19.

You can read the full text of the legislation here: Title III of the bill deals with the temporary increase in the exemption amounts for federal estate, gift and generation skipping taxes. House approval is expected and the bill could be on the President's desk before Christmas.

Thanks to Brian Lindberg and Fay Gordon or NAELA for this upated information. See also, "Senate Overwhelmingly Approves Tax Cut Deal," Washington Post, December 16, 2010. 

Saturday, December 11, 2010

Senate Bill lays out rules for Estate Taxes in 2011 and 2012

Senate Majority Leader Harry Reid has introduced legislation to enact the Obama/Republican tax cut compromise. Entitled the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” the provisions of the legislation can be reviewed through the Senate Democrats website at  

Section 3.02 of the Reid bill lays out the proposed estate, gift and generation skipping tax rules for 2011 and 2012. These include:
  • ·       $5 million dollar exemption per individual
  • ·       35% top tax rate
  • ·       Portability of the exemption for married couples. (The unused portion of an individual’s $5 million exemption can pass on to the estate of their surviving spouse.)  
  • ·       Unified Estate, Gift and Generation Skipping taxation at the $5 million level. For example, if you make a “taxable” gift $4 million dollars during your lifetime, you will have no immediate tax to pay and will still have $1 million remaining to use to offset estate taxes at your death.  (There is no change in the annual exclusion for gifts, which is currently set at $13,000 a year per done.)
  • ·       The $5 million dollar exemption is indexed for inflation, which suggests a possible extension of the rules for 2013 and later years according to an article in the Wall Street Journal.  However, the past has taught us how difficult it is to predict the future of the estate tax.   

The $5 million dollar exemptions and 35% rate will sunset at the end of 2012. Cautious individuals and couples may view the next two years as a golden opportunity to transfer wealth to future generations at very low cost.

The Reid bill is structured as an amendment of the current law that was enacted as the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001.  (Title V, Sections 501 et. Seq. of EGTRRA dealt with estate, gift, and generation skipping taxes). So, to make sense of the provisions in the current proposal, you may need to refer back to the 2001 law. Here is a link to EGTRRA You will also want to have the Internal Revenue Code handy – it’s available online at this link:

According to the Wall Street Journal article, the Senate plans to vote on the bill on Monday.  

The bill also extends for two years all of the Bush era tax cuts for all taxpayers including current lowered rates on capital gains and dividends. It also extends unemployment benefits, grants a one-year payroll tax cut of 2% for nearly all workers, reduces the alternative minimum tax, and provides various tax credits. 

A Senate Finance Committee summary of the bill is available here

Monday, December 6, 2010

A scary thought. Your Income may need to increase a LOT during your retirement.

By Jeffrey A. Marshall

The 2010 Deficit Commission Report was politically dead on arrival at Congress.  The report (entitled “The Moment of Truth”) had the audacity to suggest that Americans need to engage in shared sacrifice through both cuts in spending and tax increases. 

Of course, the more liberal politicians in Washington are unlikely to ever accept spending cuts in programs like Social Security, and conservative politicians appear to be unable to accept tax increases of any sort.  Why embrace cutting benefits and subsidies and raising taxes if your polestar is getting re-elected in two years.  So, it looks like the “looming fiscal crisis” predicted by the Deficit Report will most likely come to pass.

“Spending is rising and revenues are falling short, requiring the government to borrow huge sums each year to make up the difference. We face staggering deficits. In 2010, federal spending was nearly 24 percent of Gross Domestic Product (GDP), the value of all goods and services produced in the economy. Only during World War II was federal spending a larger part of the economy. Tax revenues stood at 15 percent of GDP this year, the lowest level since 1950. The gap between spending and revenue – the budget deficit – was just under nine percent of GDP.

The common belief in Washington is that deficit reduction gridlock will result in our passing a financial doomsday on to our children and grandchildren.  As stated by the Deficit Commission: “America’s long-term fiscal gap is unsustainable and, if left unchecked, will see our children and grandchildren living in a poorer, weaker nation. In the words of Senator Tom Coburn, ‘We keep kicking the can down the road, and splashing the soup all over our grandchildren.’ Every modest sacrifice we refuse to make today only forces far greater sacrifices of hope and opportunity upon the next generation.”

But if you are a younger retiree, around age 65 like me, I think we are not just bequeathing financial crisis to our children – we are likely to live long enough to “enjoy” the doomsday ourselves during our remaining lifetimes.

We know that our overspending and under-taxing will ultimately translate into growing inflation. And inflation devastates retirees and others on fixed incomes.  If you are a younger retiree it is going high inflation is going to impact you.

In November 2010 the magazine Money published a short but scary article on the impact of even modest inflation on retirees. The article was written to answer a reader’s question – “what are the biggest issues new retirees tend to underestimate.”

Let’s say that you are age 65 and you just retired.  Perhaps you are proud to be living within your means – spending no more than your income. (If only the government could do that). It looks at first glance like you are on course to have your income and savings last your lifetime. The problem is, the cost of the things you need to buy will be rising over the next 20 years.  And, rising dramatically as government deficits grow and inflation accelerates.  Your income is going to have to go up as well. 

How much will your retirement income have to increase when inflation hits the things you buy?  The handy chart in the Money article gives you an idea. 


So, if you are age 65 like me, and inflation averages 5% over the next twenty years your income at age 85 will need to be 265% of your current income just to keep you even with inflation. Imagine how much your income will need to rise if the inflation rate exceeds 5%.

So, it seems to me that this deficit reduction business is not just a question of the morality of passing a lot of debt on to our children and grandchildren. New retirees - to paraphrase John Donne: Do not send to know whom the deficit bell tolls, it tolls for thee.