Throw Momma from the Train
There may be no provision in tax law more bizarre than the estate tax. In just a year and a few days, on Jan. 1, 2010, the levy will expire and estates of any size will be passed on tax-free. A year after that, the tax will return with a vengeance. Uncle Sam will take 55 percent of assets of more than $1 million.
Imagine your Aunt Sue had the good fortune to miss out on that tea with Bernie Madoff and has $5 million. If Sue dies within the next couple of weeks, her estate will owe about $1.35 million in taxes (it would pay a 45 percent rate after exempting the first $2 million). However, if she hangs on though midnight of New Year’s Eve, the exemption will rise to $3.5 million and her estate tax will shrink to just $675,000. (Btw, these are rough estimates. There are special breaks for farmers and small businesses, gift tax rules, and many other deductions).
Now, fast forward a year. Sue still has her $5 million (those laddered T-bills were a pretty good idea after all). If she dies a year from today, her estate will still owe $675,000. If she lives for just a few more days, to Jan.1, 2010, it will pay nothing.
Here is where the story becomes truly grisly. If Sue dies at 11:59 PM on Dec. 31, 2010, her $5 million will pass to her heirs tax-free. If, however, she dies 2 minutes later, her estate will owe $2.045 million in tax because the law will revert to an exemption of just $1 million and a top rate of 55 percent. Estates are also subject to new capital gains rules for 2010 only. Now you know why it is called the “throw momma from the train” tax.
A tax that goes from $1.35 million to $675,000 to zero to more than $2 million in the course of 24 months is, of course, nuts.
Equally strange is all the attention this levy gets. In October, TPC estimated that only 15,500 people who die this year will owe any estate tax at all. Of the $23 billion that TPC projected will be generated by the tax in 2008, nearly half will be paid by just a few hundred of the nation’s wealthiest decedents. Since the markets cratered, both the number of taxable estates and the amount they owe will probably be even smaller.
While few are taxed, the revenue produced by the levy is far from trivial—about $500 billion over the next decade under today’s now-you-see-it-now-you-don’t law. In the campaign, Barack Obama promised to freeze the tax at 2009 levels—a plan that would generate about $300 billion through 2018—$200 billion less than current law. The $3.5 million exemption ($7 million for a couple that does minimal tax planning) has strong support in Congress. But look for a huge fight over the rate.
While Obama wants to retain most of the 2001 and 2003 Bush tax cuts, this is one provision he’d do well to change—and soon. Besides, raising the tax might encourage some of the uber-rich to reduce their estates by spending more or giving their dough to charity. And wouldn’t that be a good thing right now?
How to Hire a Tax Resolution Company You Can Trust -7 Ways to Ensure That Your Irs Tax Problems are in Good Hands
Tax-burdened Americans seeking professional help in solving their IRS problems have more options today than ever before. The tax debt relief industry has seen dramatic growth over the past 5 years as many companies have entered the arena to offer help to taxpayers impacted by a sharp increase in IRS tax compliance enforcement.
But lately, many of these so-called tax resolution firms have been making headlines for misleading consumers with deceptive advertising and false claims that they can settle taxpayers’ debt for “pennies on the dollar.” Consequently, many firms have been exposed for taking advantage of people seeking tax assistance. For a fee, they promise to help taxpayers, but instead leave them with their original tax debt, plus additional interest and penalties.
Now consumers are being urged to use caution when dealing with firms that claim they can help taxpayers reduce their back taxes. But how do consumers choose from the large number of companies out there that offer tax relief assistance? And more importantly, how do they know they won’t end up getting ripped off?
When selecting a firm, remember that these are the people who will represent you before the IRS. Therefore it is important that you hire a professional who is well versed in tax law and IRS procedures. IRS representation is a complicated field with many different laws to interpret. While any Attorney, CPA or Enrolled Agent can represent clients before the IRS, few are truly qualified to provide the knowledge, experience and negotiating skills needed to successfully represent a taxpayer before the IRS.
When hiring a tax resolution company, keep in mind the following:
1. As a rule, the firm’s track record is the best objective indicator of how that firm will manage your case. What is the firm’s success rate? How many Offers in Compromise has the firm successfully settled? What is the total dollars negotiated in settlements divided by total dollars in tax, interest and penalties owed? Additionally, the credentials should be substantiated by an independent third party, like the Better Business Bureau. You can also ask the firm if they have been designated a Certified Tax Resolution Specialist.
2. Be leery of demands that the company be paid in full upfront. Trust is a two-way street. If you can trust that the company will provide the services as promised in their agreement, they in turn must trust that you will pay them and begin working 100% for you upon receiving a “good faith” retainer.
3. A taxpayer with a troubling problem should turn and run the other way if a company “guarantees” specific results. They are telling you what you want to hear, whether or not it’s really possible. Know that there are no sure fire ways to reduce your liability and that contrary to some companies’ claims, not everyone qualifies for the IRS Offer In Compromise program. Companies must obtain your background information and proper documentation before evaluating your situation and determining your options. An honest company will ask you lots of questions upfront in your initial consultation in order to understand the precise needs and specifics of your case.
4. Don’t be afraid to ask for the names of the owners of the company. Any hesitation by their representatives is a definite cautionary red flag that they don’t want you to know who is behind the company and ultimately responsible for your case.
5. Be sure to ask, “How long has your company been in business?” Most new companies (no matter what the business is) never make it due to a wide variety of reasons. In today’s difficult financial climate you don’t want to get stuck with a company that hasn’t been in business for at least five years. Otherwise, they might not even be in business six months from now.
6. Be especially cautious when dealing with high-pressure sales people. They are usually working in a “boiler room” where they’ve been trained to prey upon a taxpayer’s fears.
7. Always ask about the people who will be doing the work on your behalf. When will you be contacted once you retain their services? Will your phone calls and emails be returned promptly? Will your case be assigned to someone in particular so that there is real accountability? That’s another reason to never give a firm 100% of your hard-earned money upfront. Once they have your full payment, you have no recourse.