February 2002 Bulletin

Income tax, estate tax are cut

Most orthopaedic surgeons see lower tax liability

By Joel M. Blau, CFP

With approval from the House and the Senate, President George Bush has signed a new bill that will cut taxes by more than $1 trillion between now and 2011. The Economic Growth and Tax Relief Reconciliation Act of 2001 uses part of the anticipated federal budget surplus that is projected to total $5.6 trillion over the next 10 years, and is based on an across-the-board reduction in Federal income tax rates, a repeal of the current estate tax and many other tax related improvements. As with most situations that appear too good to be true, a closer examination reveals inherent limitations as well as the inability of most orthopaedic surgeons to take advantage of the new benefits. Of greatest interest to orthopaedic surgeons will be the impact of the income tax reduction and the new estate tax revisions.

Income tax rates reduced

Looking at the income tax ramifications on joint income in excess of $109,251 for the years 2001-2003, the present 31% rate will be reduced to 30%, the current 36% rate gets lowered to 35%, and the top rate of 39.6% falls to 38.6%.

These reductions are expanded for years 2004-2005 by another 1%, while rates for tax year 2006 and beyond are reduced by another 1%. The exception is the top tax rate, now 39.6%, which will be reduced to 35%, offering a greater benefit to taxpayers with incomes in excess of $297,351.

Estate tax also falls

From an estate tax standpoint, starting in 2002 the 5% surtax and rates in excess of 50% are repealed. In addition, the estate tax exemption equivalent, which has gradually increased from $600,000 to the current $675,000, is increased to $1 million in 2002. Beginning in 2004, the exemption increases to $1.5 million while the gift tax exemption will remain at $1 million without future increases. In 2006 the estate tax exemption increases again to $2 million, until 2009 when the top estate tax rate falls to 45% and the exemption increases to $3.5 million. The estate tax is completely repealed in 2010.

Sunset clause

On the surface, these tax law revisions appear to benefit those orthopaedic surgeons who have accumulated a sizeable net worth and would now be able to pass a greater amount of assets at death, or at the death of their surviving spouse. A closer look, however, reveals the fine print. Written into the Act is a "sunset" clause that makes estate tax rates revert back to 2000 levels in the year 2011.

Oddly, if your estate tax liability is zero in 2010, in 2011 you’re back to the same rates that existed prior to the new Act, creating a tax liability of up to 50%. In addition, the current step-up of basis is changed in 2010, causing a modified carryover of tax cost basis over certain amounts. The new rule dictates that the "recipients of property transferred at the decedent’s death will receive a basis equal to the lesser of the adjusted basis of the decedent or the fair market value of the property on the date of death."

Be sure to consult with your financial advisor to determine the impact of the new Act on your own personal financial situation so that you can proactively take advantage of those parts of the Act that will allow you to more effectively reach your goals.

Joel M. Blau, CFP, is president of MEDIQUS Asset Advisors, Inc. He can be reached at 800-883-8555 or blau@mediqus.com.

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