Business owners need to be aware of the tax implications of recent federal legislation, including President Obama’s extension of former President Bush’s tax cuts and changes to the estate tax exemption.
“There are a lot of potential advantages on the plate, but there are also a lot of unknowns,” says James D. Roseman, a Vice President of Wealth Management and Business Development with FirstMerit Bank. “Some things have changed and some have stayed the same.”
Smart Business spoke with Roseman about how businesses can prepare for the implications.
What has changed and what has stayed the same?
On one hand, the new legislation extended tax cuts with regard to dividends, capital gains and rates on ordinary income, for another two years — through the end of 2012. On the other, the estate tax situation was modified.
Over the past decade, the estate tax had an increasing exemption amount, which peaked in 2009 at $3.5 million, with a maximum tax rate of 45 percent. In 2010, there was no federal estate tax. Legislators then passed a $5 million exemption and a maximum estate tax rate of 35 percent for 2011 and 2012. In addition, the lifetime gift-giving exemption was capped at $1 million, while the estate tax exemption continued to increase.
Now, the new estate tax exemption and the gift tax exemption are the same. Someone can pass away with an estate of $5 million and pass federal estate tax-free to beneficiaries or they could literally give away $5 million of assets during their lifetime and pay no gift tax. It’s an either/or for the next two years.
The real question now is will the higher estate tax exemption be made permanent or will it revert to lower previous levels? As a result, you have a two-year window of advantages capped with uncertainty.
What should businesses expect over the next two years?
There is a drumbeat of concern about taxes wiping out a lifetime’s worth of building a business. The people pushing to make the estate tax exemption permanent say it will save the American small business.
Small business owners are saying ‘If my spouse and I each have a $5 million exemption, that will ensure our business passes on to the next generation without having to be sold to pay taxes.’
I expect there will be an attempt to make it permanent prior to the national election in 2012.
