Coventry League

 
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www.DieBrokeBlog.com
The federal estate tax, also dubbed the “death tax” by some, will be repealed for 2010, at least as of this writing.  This means that wealth transferred upon death, regardless of amount, will incur zero federal taxes.  Or, expressed differently, wealth transfers won’t incur egregious double federal taxation (once when the wealth is earned and once when it is transferred).

In contrast, the applicable exclusion to a taxable estate tax was $2.0 million for 2006-2008 and $3.5 million in 2009.  Amounts above these values had a maximum tax rate of 45% to 46%.  Nevertheless, to paraphrase Ben Franklin, there’s nothing certain except death and taxes.  In this case, there is a lot of uncertainty regarding the permanence of the 2010 federal estate tax repeal.  

The primary concern is that Congress might revisit the topic early 2010 and reinstate the tax retroactively to Jan. 1.  Regardless, under current legislation, the estate tax will reappear in 2011 with a 55% rate and $1.0 million exclusion.

There are many blogs about this topic: Die Broke Blog discusses estate taxes in a broader context; Mish’s Global Economic Trend Analysis addresses some personal unintended consequences; and, Wallet Pop highlights historical changes since 2001.

 
 
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Top U.S. Federal marginal income tax rates.
Given the challenging economic climate, more businesses are incurring accounting losses.  A concern for some owners is whether they are permitted to offset losses with other sources of income. 

With regard to a member of a limited liability company (LLC), the general answer is yes, according to an article published by Crain’s Cleveland Business, written by Carl Grassi, president of law firm McDonald Hopkins LLC.

The author states “as a general rule, losses incurred by a business in which the taxpayer materially participates are deductible against other sources of income.”

To determine material participation, tax regulations provide seven tests, of which at least one must be met.  One test requires that the participant devote more than 500 hours to the business in the year.  Joe Kristan at accounting firm Roth & Company, PC provides a summary of the tests in everday language.

Onward to becoming more tax efficient.
 

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