Nutter's Washington

Taxed to Death At Death: The Coming Death Taxes

 

The Biden Administration has launched a crusade to increase tax rates to satisfy an insatiable appetite to fund expanded government. It has embraced one of the worse ideas in tax policy by advocating recognition of income tax on unrealized gains at death.

There is considerable confusion concerning tax consequences at death, often referred to as the Death Taxes. In two parts, I am going to explain the different facets and the consequences of such radical changes.

Part One

The difference between estate and income taxes

In order to understand all the nuances it is important to separate the income tax from the estate tax. The federal estate tax does not impact all that many estates even though the estate of every U.S. citizen is subject to tax upon death. Within certain limits, the decedents estate may have to cough up addition dough to the government for dying and having property. However, there is a lurking income tax issue out there that goes along with it and it is a sneaky one.

Many conservatives refer to the estate tax as the ”death” tax and would like to abolish it. Liberals, of course, believe everything belongs to the state and would like to have as high a tax rate and lowest exemption level as possible. There are also a few in the middle, like me. I have no problem with a reasonable tax rate on very large estates.

The dirty secret is that these very large estates through private foundations, charities, generation trusts and other such devices can largely blunt the effect of the estate tax and still more or less control the money from the grave.

The Starting Point is Basis

Every asset has a “basis”, usually its cost. It is the benchmark for future tax consequences, like selling, gifting, asset depreciation and bequeathing.

Property can be disposed during a lifetime like selling, gifting, or abandoning it. For example if my aunt buys a share of stock, which she paid $100 for 10 years ago, the $100 is her basis. If she sells it for $1000, she would incur a taxable gain of $900.

If she gives the stock to me, my basis is $100, and if I sell it for $1000, I have a $900 gain, which would be included in my income taxes. This is called “carryover basis”.

If the aunt dies and leaves the stock to someone, the asset acquired from her estates is “stepped-up.” That is to say, the assets in an estate and the subsequent beneficiaries receive a new income tax basis equal to the fair market value of the assets on the date of the decedent’s death, (or on an alternate valuation date an estate may elect on the six-month anniversary date of a decedent’s death.) Accordingly, a beneficiary will pay income taxes on any received assets subsequently sold based on the difference in value of the assets between the date of death value and the sales price.

In the above example instead of gifting the stock the aunt conveys it at her death, the beneficiary gets a basis of $1000 and upon its sale for $1000, there is no income tax because there is no gain. This is one of the few ways to avoid tax on appreciated property but, of course, someone has to die.

I would argue preserving stepped-up basis is much more important to the average taxpayer than whatever the estate tax rates are on mega-estates. This is an income tax issue after all. Normal taxpayers who inherit property do not always know what the basis is to the property received and why subject the property to the estate tax and then to the income tax?

Part Two will describe the consequences of the Administration embrace of installing a regime that will impose income taxes in all situations when a person dies.

Biden First Year Report Card--Still in First Grade.

It has been one year since Joe Biden took the oath to office to be President of the United States of America. The “healing” President has done at least as much and perhaps more than his processor to divide the nation, making outlandish statements and fabrications. The difference between the two is that Mr Trump knew better but Mr. Biden does not.  Let’s take a look and evaluate this first year.

Border security and immigration— Complete failure. Hordes of “migrants” have illegally entered the country, are allowed to stay and many more have massed at the border Grade F

Inflation and the Economy- Inflation is at a 40-year high largely caused by easy money and grossly increased federal spending with more proposed spending and income transfers on the table. The unemployment number is good but the labor market is in turmoil, causing increased wages, which just put more pressure on prices. This is not temporary as promised. Been to the grocery store lately? Grade F

Real wages- Real Wages have decreased. Grade F

Energy- Gasoline prices and home heating prices have soared. The Biden Administration has accused the oil companies of collusion all the while of taking actions to decrease domestic production and then ironically begging OPEC to ramp up its production. Grade F

Pandemic- After announcing the pandemic was under control last summer, it appears such was not the case. The CDC announces new edicts, and “guidance” and then constantly changing them. Biden has said- in a change of position- the Federal government is more or less impotent and it is up to the States to deal with the situation. The Covid problem is unsolvable, berating people rather than encouraging them to get a vaccine has not be helpful, Mandates were a political overreach, sending testing kits is pabulum and giving free masks is a sop. It is all political rather than useful. However, the grade is C as the options are all bad.

Russian-Ukraine- Mr. Biden has projected a weakness and makes ineffective threats about “strong action” against a Russian incursion or invasion into the Ukraine. He has failed to make enough defense aid available and just murmurs empty words. All talk and no hat. Mr. Biden has never been right on most foreign policy issue going way back and there is NO reason now to think any differently. Grade D minus.

Afghanistan and the Middle East- The President who always thinks he is the smartest person in the room proves again his skill set. Horrible blunder, badly executed and horrible deadly results. Grade F enough said.

Voting Procedures- The campaign to federalize national voting has been full of deception and shallow, hollow, misleading and nasty rhetoric. Those who want to allow states to have their own election laws –such as voter identification, registration, and time to vote are not racists and not denying anyone to vote. The fact many Democrat controlled states have stricter voting procedures than many of the states being vilified speaks for it. Grade F

Congressman Relations- The Administration has followed the ultra liberal path with the narrowest margins. There has been almost no real attempt to try to work on a broader scale. The collapse of the social welfare spending program, the failure to change the filibuster to ram their program through is an indication of arrogance and a “my way or the highway” attitude. How did that work? Grade C minus

Leadership- Mr. Biden poll numbers are dismal. He looks unsteady and his comments wander and often do not follow the conversation. He has lost the confidence of a good part of his own party and projects the image of a deer in the headlights. He has failed to bring anyone together and sounds shrill and robotic. Grade D

It is hard to think anything positive about the first year in office for Mr. Biden. He looks like a desperate man, wondering where he is after his nap, bent on transforming America to some unrecognizable place where the government just gets bigger and more powerful, where economic and social decisions are make for us, where a bigger and bigger percent of the population depends on government subsidies, where if you do not agree, you are a hater, a racist and a deplorable.

A sad state of affairs.

Bob Dole: Remembering

Senator Robert J Dole is being put to rest. I had the opportunity to work on the Senate Finance Committee for him. It was quite an opportunity. He was very receptive and  had his own instincts but listened. When I interviewed for the job, he asked me only one question. " Do you know anything about oil depletion." I responded " Yes, Section 613A of the Code." Well that was enough. 

I found the Senator quite relaxed in a small setting and we had many a bowl of butter pecan ice cream in the Senator's Dining Room in the Capitol when in late night sessions. 

There was also the 3 Presidential Campaigns. Shame he never made it. This placard  which is actually from the 1996 South Carolina Primary has been hanging in my house for many years. 

God bless you Senator. You were important to me and to all of us

 

 

Inflation: Clueless in Washington hiding in basement.

In case you have been hiding in the Presidents’ basement, you may not know the Consumer Price Index rose 6.2 percent in October from a year ago, the fastest pace in more than thirty years. Prices are up everywhere. Been to the grocery store lately? Gassed up the fossil fuel powered car?  Paid the utility bill? How could this be as the Government said this was and is temporary and is not an issue or concern. What is not surprising is the President is clueless. He continues to insist the Congress pour more money into the economy. The Better Watch Out Bill of who knows how many trillions of dollars would continue to inflame the coming inflation inferno. Seems like the President went to the Jimmy Carter School of Economics. He will do and say anything and distort the reality to get his program enacted.

The President- the climate savior- fusses about the high price of gasoline but has done about everything possible to suppress domestic production-eliminate federal leasing, stop pipeline construction, trying to restrict capital markets from financing fossil fuel projects and on and on. At the same time, he has begged OPEC nations time and time again to increase their production to drive down prices. How demeaning. Am I missing something here?

This Administration has tried to elevate wages, which of course will be reflected in prices later on. What they have missed is that real wages have actually gone down. So a person can make more nominal dollars but can actually buy less. Duh. It is just going to get worse.

Taxed At Death: How Could the Deceased Owe more Taxes? Isn't Death Enough?

In part one, there was a discussion of how assets are treated upon the death of the taxpayer. Now, it get worse

The centerpiece of the President's tax proposal is much more than an increase in the capital gains rates. The Administration also wants to eliminate the current system by requiring estates to pay capital gains taxes upon death. That is to say, when a person dies, there is a phantom taxable gain on all appreciation in value of a property even though there has been no disposition of the asset.

Part Two: Taxed to death upon death

This is an income tax issue on major consequences and will deeply impact many small businesses, landholders, farmers, ranchers and even those who have owned their homes for many years. It is purely an attempt to raise taxes to enlarge government. It can definitely not be viewed as a deficit reduction measure, particularly the way the Federal government has expanded subsidies, and the welfare state. Deficits will continue to expand for more than the foreseeable future; particularly as interest debt payments and interest rates increase.

Asset appreciation could, in theory, be measured and taxed when the property owner dies and the assets or businesses are transferred to the heirs.

However, a under longstanding provision of US tax law, in place since the Revenue Act of 1921, the transfer of assets at death to an heir does not trigger a capital gains tax. Current tax law allows the heir to increase their basis in the bequeathed assets to fair market value without payment of capital gains tax. This is referred to as a ‘step-up’ of basis. The basis step-up prevents potential past capital gains tax on inherited to be taxed.

The Federal Treasury forgoes-according to some-a substantial amount of revenue by not taxing the gain on assets held until death. In fact, according to the Office of Management and Budget, it is one of the bigger existing “tax expenditures.” which is defined as revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” 

Tax expenditures have the underlying assumption that the government is allowing taxpayers to keep their own money. It is important to note in the case of stepped up basis, it really not possible to know with any certainty, as data from all people who receive property from a decedent is not verifiable particularly where an estate tax return is not required to be filed.

There have been a few attempts to repeal this 100-year-old established principal of stepped-up basis. There was some fleeting success to a certain extent in Tax Reform Act of 1976, which installed a type of carryover basis regime and eliminated stepped-up basis. However, led by Senator Harry F. Byrd Jr. (I-VA) and Senator Robert J. Dole (R-KS). The provision was suspended and eventually repealed by Congress in short order

The Biden proposal goes beyond the elimination of “stepped-up basis”. It calls for a realization event at death, which means the asset will be deems sold at its fair market value even though it was not, and any untaxed appreciation will be recognized as gain.

So in the previous example, even though the aunt dies and passed on the asset, which is unsold by the beneficiary, there will be substantial income taxes due from the aunt.

Take an even worse example; a family farmer owns agricultural land which been has farmed for 40 years. The price of the land has gone up due to inflation and perhaps other reasons. The farmer wants to pass it on to his son to farm. There is a substantial income tax liability at the farmer’s death but there is no money to pay the tax so the result is the land must be sold, no more family farm.

In order to quell opposition to this very bad idea, the Administration proposal will likely be littered with income levels, carve outs and exceptions but the fact remains a person who dies will have all his property that has appreciated subject to income tax. A pretty horrible and drastic concept and a deviation from long established tax principles. When is enough enough?

These are uncertain times but any big tax expenditure is in jeopardy in a climate of tax increases.  Repeal of stepped-up basis is not necessarily an immediate tax hike that can be felt by everyone but it is a tax increase. Instigating an income tax at death goes far beyond this concept.  

In summary, there have been a number of proposals to repeal the step-up in basis at death to tax gains that were not recognized during the decedent’s lifetime.

The worse by far is to tax gains at death--- that is to deem death to be a “recognition event.” This tax would be in addition to any estate taxes owed, and if no money were available to pay what could be a sizable amount, the asset would have to be disposed. If the heirs take the property, a new fair market value basis would be in place to prevent double taxation in the future.

Promoting income taxes at death is such a terrible idea, destructive, punitive and just shows bad ideas never go away.

Kamala Harris in NOT a Moderate: Attempt to Rebrand.

I have seen a number of news articles describing Senator Harris as a “moderate” and a “centrist” Goodness, this is so transparent. Do the writers, media sources, pundits actually believe that? If so, we are in more trouble than I think and further do they think that people will believe it and be swayed?

Senator Harris is an unabashed ultra liberal. She believes in one form or another in open borders, not criminalizing illegal border crossers, bloated government programs, much higher taxes and government controlled health care just to name a few of her not moderate positions. She has aptly demonstrated the art of unfounded character assignation during the Kavanaugh confirmation hearings, assigning the term racist on the undeserved, identity politics and historical revisionism. Not a moderate. Although one has to wonder in the new Democrat party what is a moderate?

She is so far off center; she is not even in the circle, she could not find the center with a guide, a flashlight, and a map.

She is, of course, free to believe and advocate in whatever she desires. However, do not call her a moderate in the guise of making her views seem mainstream. It is insulting and dishonest.

Why all the hate?

From where does all this hate come? How did it get this way? Who are these people who spew venom and loathing? What ever happened to integrity and truth? Where are fairness and inalienable rights, due process, and civility? How did we let our leaders become so power obsessed and so tainted? How did these leaders become so arrogant, self-knowing that only they are right and the rest of us have to step in line, swallowing their garbage, not being able to think for ourselves, and not question their wisdom?

I do not know and it is beyond my comprehension. Where are the principles that hold this country together? Coarseness, crudeness and rudeness have become the norm.

This state of affairs is illustrated by the House of Representatives push to get rid of a sitting President no matter what. If Russia did not work, then find another country. Invent any theory, distort any facts, and find any reason- real or made up. It is something out of the classic 1984. One the other side, the ignorance, antagonism, bungling, useless slander by those aligned with the Administration are also astounding. Pox on all of them.

 

It is almost to the point that no one can be believed. Actions and motives are suspect, character is assassinated. Lies are told. No one wants to do the right thing even though it is known. It is WE versus THEM and THEM versus US. As for me, I am neither a THEY nor a WE.

 

I suspect the House will eventually approve Articles Of Impeachment against the President. Such an action will not result in his removal but it will poison the water for some time to come. There will be a price down the road to pay. Is that worth it? What will any successors be subjected to? Where does it all end? HINT: The answer is not--after the next election. 

Perhaps, we all get what we deserve.

Trump = Hoover?

Enough said. Elections coming. 1932 and 2018. What is the

difference?

Eighth Grade Democrats

 

Untied States Democrat Senators are refusing to participate in just about any type of legislative activity these days This would include consideration of the (un) Affordable Health Care Act, which by most standards needs major (and I mean major) changes before it withers away.

Democrat Leaders have done about all they can to obstruct the business of the Upper Chamber. Senate Minority Leader Chuck Schumer (D., N.Y.) invoked a rule yesterday to cancel committee hearings for the day, and the party plans to object to parliamentary moves requiring unanimous consent, which just about brings on paralysis.

Isn’t that special? So grown up. So productive. It is like being in the eighth grade. Why were these people elected in the first place? Sen. Chris Murphy (D., CN.), that giant legislator and thinker was quoted as saying “I think we’ll use every tool at our disposal.” Nice, Senator.

I have always thought it was best to participate in the process, no matter if you are going to win or lose. Best to make your case, try to improve a bill, as you deem right. Do your job. Represent your constituents. Playing silly games is just as it seems. No wonder things have become so nasty and partisan.

I have no idea about the substance of the health care bill, other than it does not seem to work (remember-“you can keep your doctor” and “it will save you $2500”?) but that is not the point. Shame on the Democrats or any Member of Congress who whines and ignores their duties. Actually, now that I think about it, real eighth graders are much more sensible.

TIME TO GET GOING ON REAL TAX REFORM

 

BY: Jack O. Nutter

Tax Reform. Seems so obvious. For what are we waiting?

There is a dire need to overhaul the Federal income tax system. I do not see any disagreement on this notion. The tax code is a mess and littered with a bunch of garbage and ineffective narrow provisions. It is an unwieldy product of an entrenched political system. I do not know how anyone can defend it.

With the installation of Donald Trump flanked by a Congressional Republican majority it would seem the stars are aligned for tax reform. It is an opportunity that does not come along very often and should not be squandered. However, the issues and the politics are very intricate and success is not assured, but it is time to get moving.

The fundamental role of a tax system should be to raise sufficient revenue to fund the legitimate and democratically agreed upon government functions. Unfortunately, that is not the case for our system.  It has become about picking winners and losers, rewarding friends and trying to punish enemies. It has become a philosophic opportunity to shape government, society and direct individual conduct.  The country can do better.

So, if the system is broken, if there is great support for “reform”, what is the holdup? What is the problem?

Tax reform has been studied for years. I mean real reform. Simplification, Not just simple rate cuts or adding more preferences, but getting the favoritism and distortions out. These are not any real new ideas. It has all been out there for years, studied and re-studied.

Mr. Trump had a sort of campaign plank on taxes and economic policy, which resulted in a one-page summary and outline of a tax proposal released about a month ago. Got to be kidding, right? The House Republicans at least put forth a more detailed plan –the so-called Blueprint but that was a year ago. Chairman Kevin Brady (R-Tax) has been meeting with his colleagues on the Ways and Means Committee and has started to hold some hearings, but really, move on. We have not seen much of any real consideration by their counterparts in the Senate, except to hear what they are against. The Treasury Department is devoting time and effort in trying to flush out a more detailed proposal, but it seems one day they are for this and that, and the next day it changes.

I know in most instances it is better to take your time to get things right. Changes to the tax system will have to survive intense, very intense lobbying pressure. Every deduction, credit, deferral, or special treatment—just fill in the blank- has a champion on the Hill.

The opening to enact tax reform is not all that wide given the complexity of the issue, the political climate and the differing approaches of conservatives and liberals. One side is revenue hungry and the other side loathes new taxes. One side wants to redistribute wealth, punish businesses and upper-income taxpayers and the other side wants to promote growth according to their economic “trickle down” theory.

Move over Health Care: Tax Reform and Income Exclusions Examination

Move over Health Care--- It is time for what really matters. Tax Reform. Unlike tax reduction, tax reform means fundamental restructuring of the way the system works and the incidence imposed for the pleasure we all get by contributing our earnings for the greater and lesser good.

It has been a long time since major tax reform was enacted. Long time. It remains to be seen if this will be the time of not. If not, then I say get rid of all the politicians and start completely over with a new crew.

No serious, un-serious person would possible believe the current system is a good one. That is not even open for debate.

So what can be done-?

The usual mantra for tax reformers is to expand the tax base. By expanding the tax base will increase revenues and promote fairness in the tax system.

However, all of this begs the question what exactly is included in income? Where is the starting point to make all the calculations for gross income, to adjusted gross income to net income to taxable income to actual taxes paid?

It is no surprise that the tax code takes a very expansive view on what is income. Gross income in the foundation Section 61 of the Internal Revenue Code states that it includes "all income from whatever source derived”. How is that for legislative drafting! 

Section 61 goes on to define income to include “(but not limited to) the following items:(1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents;(6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payment (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust.

That is quite a list and courts have consistently given very broad meaning to the definition of income, interpreting it to include all income unless a specific exclusion applies.

So now this is the fun part and the part that does not get much attention. --”Exclusions” from income. It seems that even though you have income, it is not really income because the government says it is not for whatever reason and purpose attached. It is social policy, picking winner and losers, a selective subsidy. The list is long and I think is worth examining. Some of the important exclusions include:

Gifts and Inheritances: A gift, bequest, or inheritance is excluded from gross income.

Life Insurance Proceeds: Life insurance proceeds received by the beneficiary are not included in gross income.

Sale of Residence: Sales of principal residences are eligible for a $500,000 capital gains exclusion.  

Retirement Income: A portion of the Social Security benefits or railroad retirement benefits.

Interest on State Obligations: Interest received on state and local government bonds is generally excludable from gross income.

Fringe Benefits and other employee benefits: Non-taxable benefits include group health insurance, group life insurance for policies up to $50,000, and other certain fringe benefits, including those under a flexible spending or cafeteria plans. (The health insurance exclusion is a major benefit) 

Adoption Expenses: Taxpayers may exclude from gross income certain amount of adoption expenses received.

Compensation for Injuries and Sickness: Specifically excluded from gross income are payments under workers' compensation, damages received on account of personal injuries or sickness, payments under accident and health insurance for personal injuries or sickness

Meals and Lodging: Employee may exclude the value of meals furnished by the employer in certain circumstances

Educational Assistance Plans: Certain payments of up to received by an employee for tuition, fees, books, and supplies under an employer's assistance program may be excluded from gross income.  

Tuition Reduction Plans: Qualified tuition reductions made available to employees (and their families) of qualified educational institutions are excludable from the employee's gross income.

Dependent Care Assistance Programs: Dependent care assistance benefits paid under an employer plan are excludable from the employee's gross income,

Military Benefits: Qualified military benefits are excluded from gross income.  

Scholarships: Excluded from income.

Foreign earned income:  Exclusion for U.S. citizens or residents for income earned outside the U.S.

And there are more as the above list is for illustrative purposes. Perhaps each one can be justified on some level, perhaps not.

There are dozens more but each one has a cost to the fisk. Several years ago, I put together a list of the “cost” to the Treasury. I am too lazy to update the list but a look at the cost of some of them taken from a few years ago include:

• Capital gains exclusion on personal residences: $35 billio
• Exclusion of Interest on State and local bonds: $26 billion
• Exclusion on Worker’s Compensation benefits:  $6 billion
• Exclusion of reimbursed employee parking benefits: $3 billion
• Exclusion of parsonage allowance: $600 million
• Exclusion of employer transit passes: $500 million
• Exclusion of Railroad retirement benefits: $400 million
• Exclusion of Volunteer EMS and Firefighter benefits: $80 million 

The point being is that reforming the tax laws is a complicated process. These exclusions have big revenue impact. They are often overlooked in the discussion on how to design a better and fairer tax system. Many have been embedded for years but they need re-examining. If the traditional and better known “tax expenditures” are to be served up in tax reform, the exclusions are should be first appetizer.