Congress seems to do two things when it passes a new tax act.
First, it tries to make people think that the new law is going to be best thing since sliced bread by loading the title of the legislation up with all kinds of positive sounding words and phrases.
Two examples that are relevant to today’s topic on last Friday’s IRS announcement of estate tax guidance for decedents who died in 2010–the 2001 tax law known affectionately as EGTRRA and the 2010 tax law that extended the so-called Bush tax cuts known as TRUIRJCA.
The “EG” in EGTRRA stands for “Economic Growth.” The “JCA” in TRUIRJCA stands for “Job Creation Act.”
Wow, if only it were that easy to have economic growth and job creation–just pass a bill with a hopeful title.
Second, is it just me, or does Congress try especially hard to make the acronyms for tax acts sound as if it is the sound someone makes when he’s gagging?
Anyway, back to the main point.
EGTRRA, which was enacted in 2001, provided among a boatload of other things that the federal estate tax would not apply in 2010. It was assumed in Washington, I suppose, that sometime between 2001 and 2010, Congress would get around to doing something–you know, passing legislation–to deal with the imposing issue of having no estate tax in 2010.
A funny thing happened though. Congress ignored the problem.
I know. You’re shocked, shocked that there is gambling going on in Rick’s Cafe.
Seriously, anyone who hasn’t been on vacation on a desert island for the past few months is probably yawning with a deja vu attitude that what else would Congress do other than kick the can down the road on this issue as well.
So, what happened when New Year’s Day dawned on January 1, 2010, is that suddenly there was no federal estate tax in the United States for those lucky (or unlucky, depending on your perspective) to die last year.
In truth, no one really knew what was going to happen with the estate tax in 2010, even as days, weeks and months ticked by last year.
Finally, as many will recall, not long before Christmas (again, Congress waiting to the 11th hour and 59th minute), Congress passed TRUIRJCA–you know, that Job Creation act.
Among all the job creation provisions, Congress reinstated the federal estate retroactively for 2010.
One of the big provisions of the federal estate tax is that property that passes from decedents to their heirs receives a step-up in basis to the fair market value of the property as of the decedent’s date of death. Thus, property with a low basis in the hands of a decedent, but with a higher fair market value, receive that higher fair market value as a basis in the hands of those receiving the property from the decedent. The result–an income tax savings on sales of that property in the hands of the heirs.
With the reinstatement of the estate tax, there was good news and there was bad news. First the bad news, the estate tax was reinstated for decedents in 2010. The good news is that the step-up in basis provided for in Section 1014 of the Internal Revenue Code came back into law.
For some people, the good news was seriously outweighed by the bad news. The IRS on Friday provided some helpful guidance for those 2010 estates that would prefer to forego the Section 1014 step-up in basis in return for not having to pay federal estate tax.
IRS Notice 2011-66 and Revenue Procedure 2011-41 explain all the details of making a so-called Section 1022 Election. What that is, in essence, is an election to have the estate tax not apply to a decedent who died in 2010, in return for not getting the Section 1014 step-up in basis. Instead, the basis in property received by a decedent would be determined under Section 1022 of the Internal Revenue Code, which is the provision that sets the basis for property received by gift. In summary, it provides for a carryover basis with the basis no greater than the fair market value of the property. So, if the decedent’s basis was less than fair market value, that lower basis would be carried over to the property in the hands of the heirs who receive it from the decedent’s estate.
In order to make the Section 1022 election, the estate will need to file a Form 8939 with the IRS on or before November 15, 2011.
Now that, as a country, we’re dealing with tax issues that arose over a year ago, perhaps we can move on to deal with the financial issues and fiscal mess we’re in now sooner rather than later.
Your thoughts?