Tax and Estate Planning Blog : Moodys LLP and SNC Law

On February 14, 2011, the Treasury Department released the President’s 2012 budget proposal. The proposal, or better known as the “Greenbook,” outlines the tax policies of the Administration. The following is a brief summary of the most relevant provisions that could impact a US–Canada cross border client:

1.  US Individual Tax Rates – The Greenbook proposes the individual tax rates increase back to the pre-Bush 2001 tax cuts.  The highest federal individual tax rate would increase to 39.6% and the 33% federal rate would increase to 36%.  The federal long-term capital gain rate would increase from 15% to 20% and all dividends would be taxed at ordinary rates up to 39.6%.  Qualified dividends would remain at 20%.
   
   
2. Estate and Gift Tax Rates – The current estate and gift tax exemption amount is $5 million and the tax rate is 35%.  Without Congressional action, the exemption amount will drop to $1 million and the tax rate will be 55% effective January 1, 2013.  The Greenbook proposes the exemption amount and rates return to the 2009 level, which means a $3.5 million estate tax exemption, a 45% estate tax rate, a $1 million gift tax exemption and a 45% gift tax rate.  
   
3. Permanent Portability – Under the 2010 Tax Relief Act, for the first time, the estate and gift tax exemption amounts are portable between spouses as discussed in our December 21, 2010 blog.  A surviving spouse may use the predeceased spouse’s unused gift and estate tax exemption amount.  The Greenbook proposes Congress makes this rule permanent.  
   
4. Limiting Dynasty Trusts – Since most state legislatures have abolished the common law Rule Against Perpetuities, Dynasty Trusts are created to shelter wealth from transfer taxes.  Under state law, most of these Trusts can continue for an indefinite period of time.  The Greenbook proposes a limit of duration to 90 years.  
   
5. Defer Interest Expenses Relating to Deferred Foreign Income – Currently, a US taxpayer can deduct interest and other ordinary and necessary business expenses, including expenses allocable to unrepatriated foreign-source income that is deferred and not subject to tax. The Greenbook proposes the US taxpayer defer the deduction until the deferred foreign-source income becomes subject to US tax.  The deferred deductions would be carried forward indefinitely.