I spent a weekend studying the new federal budget. I cannot make the numbers work. I thought of the signs which used to be so prominent in London tube stations - "Mind the Gap."
The Congressional Budget Office tells us that federal expenses are running at about 25% of gross domestic product and income is about 15% of gross domestic product. Anyone who manages a household knows that does not work for long. "Mind the Gap."
When you project future operating results for a business or for a government, if you are not conservative with the income expected and liberal with the estimated expenses, you can run into trouble later.
In 2001 and 2003 the economy was doing well, the budget was manageable, the road ahead looked rosy, and Congress reduced income taxes and estate taxes. In 2010 the road ahead looks rocky, and Congress will have to increase taxes.
The tax cuts enacted many years ago are about to sunset. If Congress simply lets the present tax cuts expire, in 2011 the long-term capital gains rates will increase to 20%, income taxes will go up across the board to a high of 39.6%, and qualified dividend income tax rates will also rise to a high of 39.6%. The estate tax exemption equivalent will drop to $1,000,000 and the top estate tax rate will rise to 55%.
There may be changes in the federal income tax and estate tax structure. The Treasury Department has a laundry list of things it wants to have included in any new tax legislation. These include, for example, limitations on reductions in value for minority interests in partnerships, limited liability companies, and other entities used in estate tax planning.
You might want to consider investments in tax-free assets. Remember that short-term gains are taxed at ordinary income rates. If investments are held longer than one year, any realized capital gains may qualify for the lower federal long-term capital gains tax rates.
Right now we do not know what the future holds in terms of specific income and estate tax policies. We will be glad to advise you how to deal with the various changes as they appear.
