August 2001

Society Updates Press on New Tax Legislation

Though the new estate tax law is slated for complete repeal in 2010, there are five congressional and two presidential elections that could say otherwise. Therefore, the moral of the story, according to Alan D. Kahn, chair of the NYSSCPA Public Relations Committee, is to continue with estate tax planning, taking advantage of increased exemptions, lifetime gift exclusions and reduced rates while they are still a part of the federal tax code.

Morals, lessons and insight were abundant at the July 31 New York State Society of CPAs press briefing featuring Kahn of the AJK Financial Group, Janice M. Johnson of American Express Tax and Business Services, and sole practitioner Alan J. Straus. Held at the Williams Club in Manhattan, the briefing examined the present and future implications of the 2001 Tax Relief and Reconciliation Act. Representatives from Accounting Today, Electronic Accountant, Newsday, BusinessWeek, The Wall Street Journal, and Financial Planning attended.

Though there are many improved provisions in the revised inheritance tax, including the increase in the lifetime gift exclusion, which will rise to $1 million on Jan. 1, 2002, Kahn pointed out that the act failed to hike up the annual gift tax exemption. The $10,000-per-person gift exclusion has not changed since 1981.

“The big losers in estate tax repeal are the states,” Kahn said. Because states like New York will no longer be able to levy the federal credit the tax revision is eliminating, Kahn said the states will have to find new sources of lost revenue, perhaps through enacting a new estate or inheritance tax.

Unlike the states, however, education came out ahead with the new act, especially in the area of 529 college savings plans. Among the different enhancements to the plan, qualified withdrawals are federally tax-free beginning next year. Rollovers from one state 529 plan to another can be executed tax free, provided the money is invested within 60 days; and starting in 2002, contributions may be made to both a 529 plan account and an education IRA for the same beneficiary in the same year, Kahn said.

Like Kahn, Johnson said the new law clearly favored education, but she expressed serious concerns over other items in the legislation. Among those, Johnson said the tax act threatens to put more taxpayers into the Alternative Minimum Tax as the income rate reductions begin to take place. Once income from the AMT, which experienced increased exemptions only for 2001-2004, begins to roll in, Congress will be hesitant to tinker with the tax, she said.

Johnson, a member of the NYSSCPA special task force examining this year’s tax changes, also pointed out some shortcomings in the child tax credit, which will top out at $1,000 per child in 2010. Middle-class taxpayers living in the New York City area are unlikely to benefit much from the credit as their income levels typically are much higher than what Congress deems the average income of middle-class Americans, she said.

Straus’ presentation highlighted retirement planning incentives. According to the CPA and attorney, the best-kept secret of the new law is the tax credit that is available to low-income people who contribute to an IRA account or a 401(k) or 403(b) plan.