Happy New Year to all of you! - (from Vern Jacobs)
Hopefully, the new year will be both prosperous and free of further restrictions on our liberties, but I'm somewhat apprehensive about the latter.
With a Congress controlled by the Democrats, the prospects for beneficial tax and economic legislation isn't favorable -- particularly in the international part of the tax law.
At the best, Bush might be able to prevent any adverse changes in the laws with the veto, but the Democrats can make that very difficult by including unfavorable tax legislation with other bills that are essential for Bush to approve.
I make no claim to having a crystal ball or a good track record at making prognostications, but here are a few personal observations about what we might expect in the next two years.
Regarding the reduced personal income tax rates, it seems unlikely they will be repealed with new laws. The expansion of the 10% bracket clearly favors lower income taxpayers and is likely to be retained for at least the next two years. (It is scheduled to expire after 2010.) The expansion of the 15% rate bracket for married couples is scheduled to expire after 2010 but it doesn't seem likely to be a target for the Democrats who claim to be advocates of the middle class and the poor.
The increased exemption for the alternative minimum tax is scheduled to expire after 2010 and if the Democrats are still in control of the Congress, it probably won't be extended. On the other hand, repeal of the expanded exemption is unlikely in the next two years.
The estate tax is due to expire in the year 2010 but will be automatically re-instated in 2011 to the levels of the 2002 rates and exemptions if it is not extended. Some of the Democrats may attempt to change the law before then to reduce the exemption and increase the rates, but I suspect changes in the estate tax won't even get to the President's desk in the next two years. After 2008, it will depend on the shift in power resulting from the 2008 elections. Some speakers at estate planning conferences have suggested that the eventual outcome will be a compromise to keep the estate tax but with a much larger exemption than in the past. They speculate that we may end up with an exemption amount of $2 to $3 million.
What does seem to be at risk are some of the international tax rules.
High on that list is an attempt to impose a tax on unrealized gains of assets for those who expatriate. (A similar law exists in Canada.) Some of the Democrats want to repeal the foreign earned income exclusion, but that will be resisted with extensive lobbying by large corporations, by the CPAs and by the tax bar. There are proposals in the Congress to require tax preparers to be more "diligent" in seeking information about clients who have foreign accounts or foreign trusts, but that is being resisted by the tax accountant and tax law
organizations.
Some influential members of Congress don't seem to believe that the present laws are adequate to deter U.S. taxpayers from evading taxes with foreign trusts and foreign corporations, so they are proposing heavy penalties on promoters. The definition of a promoter would include anyone who is involved in any way in helping a taxpayer to establish a foreign financial account, a foreign trust or a foreign corporation. Needless to say, the lawyers and accountants are strongly opposed to such rules. If these laws were passed it would have the effect of imposing a gag order on financial and legal advisors. Without the benefit of informed advice, taxpayers would end up relying on the advice of foreign promoters who are not subject to our laws and are largely unconcerned about helping U.S. persons to commit tax evasion.
The members of Congress who are the proponents of these restrictive rules talk about preventing people from evading taxes because it invokes some sympathy from the media and from the public. But I suspect the real reason is because they are concerned about an escalation of the movement of money from the U.S. to other countries and also of a movement of investors, entrepreneurs and even large corporations to more favorable political climates.
Hopefully, none of these adverse changes will occur in the next two years. In my humble opinion, the best we can realistically hope for is a do-nothing Congress.
by Vern Jacobs
