2016 Tax Changes (Wall Street Journal)

By 

LAURA SAUNDERS

January 8, 2016

A new year usually brings tax changes, and 2016 is no exception.

The good news is that last month, in the nick of time, Congress enacted permanent extensions of several popular provisions, including the American Opportunity tax credit, a higher-education benefit; the IRA charitable transfer provision for people 70 1/2 and older; certain mass-transit benefits; a child tax credit; and the ability to deduct state sales taxes instead of income tax on the federal return.

No longer will people using these benefits have to bite their nails waiting for lawmakers to re-enact them—especially if a provision has already expired, as happened several times over the past decade.

Here are other changes to be aware of:

Affordable Care Act penalty tax. For people who don’t have ACA-approved health insurance, the payment is rising steeply once again. Such taxpayers often owe a “shared responsibility payment” that is either a flat assessment or a percentage of income, whichever is higher. Roberton Williams, a tax specialist with the Tax Policy Center in Washington, says the percentage method will apply to virtually all higher-income households and even many single filers earning above $40,000.

In 2016, the flat assessment more than doubles. It is now $695 per individual, up from $325 last year, with a maximum of $2,085 per household. The percentage-of-income payment rises to 2.5% of income from 2% last year, with a projected maximum of about $13,400 per household.

Members of some groups aren’t subject to the payment, including certain religious groups and people covered by Medicare or Medicaid. The Tax Policy Center has posted anACA penalty calculator on its website.

Tax rates haven’t changed for 2016, but brackets have reset upward because of inflation indexing. 

Tax brackets. Because the U.S. tax code is progressive, higher income is taxed at higher rates—after deductions, exclusions and other adjustments. Tax rates haven’t changed for 2016, but brackets have reset upward due to inflation indexing. The top statutory rate of 39.6% now kicks in above $466,950 of taxable income for married couples filing jointly and $415,050 for singles.

“It’s good to know your top bracket, because it lets you estimate the value of a deduction,” says Greg Rosica, a partner with the accounting firm EY. In other words, $100 of a write-off could save as much as $28 of tax for someone in the 28% bracket.

A glance at the tax tables also serves as a reminder of the code’s unequal treatment of married couples versus single people who are above the 15% bracket. This anomaly raises tax bills substantially for some couples, especially if both partners have similar incomes, and lowers them for others. To find out if you are affected, see the Tax Policy Center’s marriage tax calculator.

Investments. The favorable rates on long-term capital gains (for investments held longer than a year) and certain dividends also haven’t changed for 2016, but inflation adjustments have lifted the brackets.

This year the 0% rate, which applies to both types of income, ends at $37,650 of taxable income for single filers and $75,300 for couples. Meanwhile, the top rate of 20% kicks in at $415,051 for single filers and $466,951 for couples.

In addition, some investors owe a 3.8% surtax on their net investment income. The threshold is $250,000 of adjusted gross income for married couples and $200,000 for singles.

This levy can cast a wider net than it appears to at first glance. That is because a taxpayer’s adjusted gross income is often much larger than taxable income, as it excludes Schedule A write-offs such as for mortgage interest, state taxes and charitable gifts. In addition, the thresholds aren’t indexed for inflation, so more investors could owe this surtax in 2016.

Mileage deductions. Lower gas prices are a boon, but they translate to lower mileage deductions on tax returns. For 2016, the business rate is 54 cents per mile driven versus 57.5 cents per mile last year.

The write-off per mile driven in the service of a charitable group is 14 cents this year, and the rate per mile driven for moving or medical purposes is 19 cents. Be sure to keep records to document these deductions.

Estate and gift tax. For 2016, the estate and gift tax exemption rises to $5.45 million per individual, up slightly from the 2015 level. This means the exemption per couple is now nearly $11 million, and only some 4,400 people will owe this tax for 2015, according to estimates by the Tax Policy Center.

The annual gift exclusion of $14,000 isn’t changing for 2016. This provision allows a giver to make tax-free transfers of up to $14,000 a year to each recipient, and one partner of a married couple can transfer up to $28,000 per recipient if the other spouse doesn’t use the break.

Corrections & Amplifications: 
The 28% tax bracket for single filers begins at $91,151. An earlier version of the chart accompanying this article incorrectly gave the figure as $90,151. (Jan. 8)

Write to Laura Saunders at laura.saunders@wsj.com

Tax Moves You Must Make Before the End of the Year (Accounting Today)

Taxes Going Up- Obama Victory means you need to act now

November 12, 2012

By Margaret Collins

(Bloomberg) The race is on for wealthy Americans to save on taxes before January 1.

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President Barack Obama’s re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.
“If you have to put a movie title on what’s going to happen from now until the end of the year it would be: ‘The Fast and the Furious,’” said Jeff Saccacio, a personal financial services partner at New York-based PricewaterhouseCoopers LLP. “The wise, smart people are preparing themselves for a sunset of the Bush tax cuts.”

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Wealthy investors have about a month and a half to examine their investment gains and losses left over from previous years, as well as to consider ways to move income into 2012 and transfer assets to heirs, Saccacio said. Now is the time to start running the calculations, he said.
“Acceleration of investment income is clear,” said Elda Di Re, partner and personal financial services area leader for Ernst & Young LLP in New York. “If anyone was planning on realizing a gain in the next two to three years on either securities or real estate, there’s a considerable amount of money to be saved.”
The Standard & Poor’s 500 Index, which is up 64 percent since Obama took office in 2009, lost 2.4 percent yesterday to 1,394.53, its lowest level since August.
Capital Gains
An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds—after capital gains taxes—of $88, according to an analysis by J.P. Morgan Private Bank. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.
Investors shouldn’t accelerate sales of securities just to avoid a higher tax rate, said Saccacio, who is based in Los Angeles. They should consider how long they planned to hold stocks and whether they need to rebalance. Those who decide to sell at current capital gains rates can re-invest in the securities if they remain attractive without violating so-called wash-sale rules under the Internal Revenue Service code that apply to stocks sold at a loss, he said.
Bonuses, Dividends
Closely held businesses that have a choice to pay bonuses or dividends in 2012 or 2013 should do so before year-end, said Joanne E. Johnson, wealth adviser and managing director at New York-based JPMorgan Chase & Co.’s private bank unit. The tax rate on dividends may jump to as much as 43.4 percent next year from 15 percent now with the expiration of Bush-era tax cuts and levies set to take effect from the health-care law.
Employees who have a choice to receive their bonus this year should do so and consider exercising stock options that are set to expire, she said.
While the election provided some clarity, wealthy taxpayers still must be prepared for the unexpected before Dec. 31, Johnson said. “We don’t know what the compromises are going to be,” she said.
Fiscal Cliff
Democrats maintained control of the U.S. Senate in the election results last week as Republicans kept their majority in the House of Representatives. That ensures continued resistance to Obama’s determination to raise taxes for the wealthiest Americans in the effort to reduce the U.S. budget deficit.
Lawmakers may have to address the so-called fiscal cliff of tax increases and spending cuts that would start in January if Congress doesn’t act in a lame-duck session set to begin this month.
House Speaker John Boehner told reporters last week that Republicans are “willing to accept new revenue under the right conditions.” He cited ideas Democrats already have rejected: restructuring entitlement programs and relying on revenue generated by economic growth from a tax-code overhaul.
Some tax-rate increases scheduled to take effect next year don’t depend on fiscal-cliff negotiations, said Di Re of Ernst & Young. The 2010 health-care law, which Republican presidential candidate Mitt Romney had vowed to repeal, applies a 3.8 percent surtax on unearned income such as realized capital gains, dividends and interest in 2013 for married couples making more than $250,000 and individuals earning at least $200,000.
Payroll TaxThe law also increases the Medicare payroll tax levied on wages by 0.9 percentage points for high earners.
Wealthy taxpayers with large carryover losses remaining from 2008 and 2009 may not want to rush to sell securities before year-end, Saccacio said. They may have enough losses to offset future gains even with higher tax rates, he said.
When capital losses exceed gains, the extra generally can be deducted on individuals’ tax returns and used to reduce other income, such as wages, up to an annual limit of $3,000, according to the IRS. If the total loss is more than the cap, the unused portion may be carried over to following years.
The Obama victory also may lead some millionaires who were hesitating to take advantage of current rules on gifts to fund trusts they’ve set up, said Linda Beerman, manager of the wealth strategies group at Atlantic Trust. The firm is the private wealth-management unit of Atlanta-based Invesco Ltd.
Estate Tax
Legislation enacted in 2010 raised the lifetime estate-and- gift-tax exclusion for 2011 and 2012. This year individuals can transfer up to $5.12 million—or $10.24 million for married couples—free of estate and gift taxes. Those levels are scheduled to expire at the end of 2012 and Obama wants to set the estate tax threshold at $3.5 million while dropping the gift-tax exemption to $1 million as it was in 2009.
“People are really rushing here at the end to take advantage of it,” Beerman said.
Wealthy families should consider setting up trusts under current rules that can benefit grandchildren or future generations and set them up in states such as Delaware, which let the entities exist in perpetuity, said Johnson of JPMorgan. The Obama administration has proposed curtailing the benefits of such trusts as well as limiting discounts taken when transferring illiquid assets in its most recent budget proposal.
Decisions about making charitable contributions this year are more complicated, Beerman said. While deductions for donations probably will be more valuable next year if rates are higher, limits on itemized deductions for those with higher incomes are scheduled to be reinstated next year, she said.
“They need to start crunching some numbers,” PwC’s Saccacio said of wealthy taxpayers. “This year, year-end tax planning takes on a heightened significance given the fact that we’re going to have this jump in rates next year unless we have an 11th-hour adjustment.”

The New Estate Tax (Forbes)

Money & Investing
Rewrite Your Will
Janet Novack and Ashlea Ebeling 01.17.11, 6:00 PM ET


Over the pained howls of liberals, Congress has increased the exemption from the federal estate tax to $5 million, leaving fewer than 4,000 families likely to be stuck paying the 35% tax in 2011. While the new estate deal expires at the end of 2012, the $5 million figure is unlikely to fall. "Rates can fluctuate, but estate tax exemptions don't get reduced," says Columbia Law School professor Michael J. Graetz, who coauthored a book on the political battle over taxing inherited wealth.

That hefty $5 million exemption, combined with a new portability provision, should allow many affluent couples to simplify their planning, leaving their assets outright to each other instead of to cumbersome bypass trusts. Portability? If a married person dies in 2011 or 2012 without using up his full $5 million exemption (amounts left to charity or a U.S. citizen spouse are estate tax free and don't count against that exemption), the unused exemption is passed to the surviving spouse. That allows a widow or widower to leave as much as $10 million free of estate tax. (No, before you entertain lurid ideas, you can't stockpile multiple spousal exemptions through serial marriages. Only what is left of your last late spouse's exemption counts.) Here's a look at what you need to know and do in 2011.

Don't ignore the basics

Whatever your age, marital status or net worth, you need a will (saying who gets your stuff); a living will (stating your wishes about end-of-life care); a health care proxy (naming someone to make medical decisions for you if you can't); and a durable power of attorney (designating someone to act on your behalf in financial and legal matters if you can't). If your situation is very simple and you are cheap, using do-it-yourself software is better than nothing. (More than half of Americans lack wills.) If you have minor or disabled children, or substantial assets, or live in a state with its own version of an estate tax, spring for a lawyer.

Review any old estate plans

"People are going to have to undo a lot of the planning that's been done,'' warns Bernard Kent, a lawyer, CPA and managing director of Telemus Capital Partners in Southfield, Mich. Example: Many couples have old wills designed mainly to preserve the estate tax exemption of the first spouse to die, something the law now does. Under these old "formula" wills, when the first spouse dies assets equal to his or her federal estate exemption go into a "bypass trust" for their kids. The surviving spouse has access to the trust's earnings and, if need be, principal, but what's in the trust "bypasses" the survivor's estate. Problem is, with the exemption jumping to $5 million (it was only $2 million in 2008) the survivor could be left with nothing outside the trust. Moreover, individual retirement accounts, primary residences and other assets that shouldn't be in the trust for income tax reasons could be automatically sucked in, warns Portland, Ore. estate lawyer Marsha Murray-Lusby.

But don't be too quick to write off all trusts, she adds. Couples in a second marriage will want a fixed amount in a bypass trust to make sure kids from their first marriages aren't stiffed. A bypass trust can also provide valuable asset protection--a consideration if, for example, the surviving spouse is an architect, obstetrician or some other professional who could face big legal claims.

Still, many couples in stable first marriages might sensibly opt to leave everything to each other outright (with an "I love you" will) and include a backup "disclaimer" trust for the kids. With this setup, at the death of a spouse the surviving widow or widower can decide, based on the laws and the couple's assets at that time, which assets, if any, to disclaim (turn down) and divert into the kids' trust.


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Plan for state taxes

Currently 21 states and the District of Columbia have estate or inheritance taxes, or both, in place for 2011. Estate taxes are levied on any amount above an exemption--typically $1 million--left to someone other than a spouse. Inheritance taxes are based on who gets the cash and can hit the first dollar of a bequest. So, for example, Maryland imposes an estate tax of up to 16% above a $1 million exemption and a 10% inheritance tax on every dollar left to a niece, nephew, friend or lover, but not on money left to children, grandchildren, parents or siblings. (Any estate tax owed is reduced by the inheritance tax paid.)

Bottom line: Couples worth $2 million or more living in Maine, Maryland, Massachusetts, Minnesota, New York and Oregon, which all have $1 million state estate tax exemptions, will still want to put at least $1 million in a bypass or disclaimer trust at the first spouse's death.

For details on your own state's estate tax exemption for 2011, see
the Forbes Tax Map.


Give while you're still breathing

As in past years you can make annual gifts of up to $13,000 to as many people as you want without worrying about gift taxes. If you want to give even more, there's a lifetime gift tax exemption that jumps to $5 million in 2011 and 2012, up from $1 million in 2010. (The estate tax lapsed in 2010, but the gift tax didn't. Any gift tax exemption used reduces an individual's estate tax exemption.) The generation-skipping transfer tax, an extra tax on gifts and bequests to grandkids if their parents are still alive, also now has a $5 million exemption, up from $1 million in 2009.

When that $5 million gift/GST exemption is leveraged with such fancy wealth-transfer techniques as grantor-retained annuity trusts and installment sales to trusts, the rich will be able to transfer huge sums, tax free, to trusts for their kids, grandkids and generations beyond. (Dynasty trusts, they're called.) "This is a huge gimme to the wealthy,'' says Jonathan Forster, an estate lawyer with Greenberg Traurig, in McLean, Va. Since GRATs and other techniques could be restricted when Congress finally goes into deficit-cutting mode and since the GST tax exemption isn't portable between spouses, lawyers are advising the very rich to begin transferring assets in 2011.

Less wealthy folks can make good use of the gift exemption, too--to avoid state taxes. Oddly most states with inheritance and/or estate taxes don't tax gifts. (The big exception is Tennessee, which imposes up to a 16% tax on gifts above $13,000 a year to close relatives and above $3,000 to others.) So if you have enough left for your own retirement years, you can start reducing prospective state tax bills by making gifts. This is also a boon for unmarried couples who want to transfer assets between partners. Be careful, however, of quirky state gotchas; for example, in Maryland, gifts made within two years before the donor's death get hit with state inheritance but not state estate tax, says Rockville, Md. lawyer Steven Widdes.

Keep income taxes in mind

Under the 2011 and 2012 estate tax law (and likely in the future, too) at your death, all your assets are "stepped up" to their current market value--meaning heirs can sell right away without owing capital gains tax. So don't give away already appreciated assets (say a primary or vacation home or collectibles) you might otherwise hold until death.

On the other hand, the $5 million gift tax exemption provides an opportunity to shift income to relatives taxed at lower rates. Got $30,000 worth of Google stock you bought for $10,000 and are ready to dump? Give it to your starving-artist daughter and she can sell it at a 0% capital gains tax rate in 2011 or 2012. (Warning: Full-time students up to age 24 are subject to the kiddie tax, which taxes investment income and gains at a parent's higher rate.)

CPA Robert Keebler of Green Bay, Wis. suggests the owner of a profitable small business run as a pass-through (the business doesn't pay corporate income taxes but passes all profit through to its owners' tax returns) consider gifting partial ownership stakes to adult children, who might pay taxes on their share of profits at, say, a 25% rate, instead of the 35% the parents pay. "The income-shifting opportunities are enormous," he says.

Giving Money to Adult Children (from AARP)

Whose Money Is It, Anyway?
By: Jonathan D. Pond | Source: AARP.org | February 15, 2010


Most of us would like to pass wealth on to our heirs, be they children, nieces, nephews, or dear friends. But sometimes, life disrupts our good intentions. That's the situation for many retirees today, who continue to suffer because of the weak economy.

The stock market is still way down from its 2007 peak, and interest rates are at rock-bottom. It's no wonder that retirees in particular are worried about their financial futures. They don't have all the time younger generations have to make up for stock-market losses.


If you're concerned about your dwindling nest egg, it's time to reconsider your good intentions. It's your money, so how compelled should you feel to save it to benefit someone else? No one needs or deserves your savings more than you. If you can simply avoid becoming a financial burden on your children or other family members, you've accomplished something wonderful. And it's all the better if you can spend a bit more to have an enjoyable retirement.

Help Adult Children; Don't Enable Them

The recession has and will continue to affect vast numbers of people, including, perhaps, your adult children. Parents can often be a source of financial help to get a child over a rough patch.

Whether you are already helping or think you may want to do so in the future, keep these two matters in mind:

First, can you easily afford the outlay? I have received several disturbing e-mails from parents who don't have much money left themselves, but who still feel compelled to help their kids. While this may be a natural inclination, you don't want to impair your own financial future. As callous as it may sound, you may simply have to say that you can't afford to help.

Second, if you are providing financial assistance, don't let temporary assistance turn into an annuity for the family member. You have to draw the line somewhere; otherwise, you might end up coddling your offspring to the point where they view the periodic assistance as an entitlement.

Communicate Your Intentions

Whatever your plans, discuss them with your children or other heirs. Don't limit the discussion to money. If all you're likely to be able to give are valuables or mementos, by all means let your heirs know what items you would like them to inherit. After all, while money is nice, family heirlooms, and the memories that come with them, are priceless.


All the information presented on AARP.org is for educational and resource purposes only. We suggest that you consult your financial or tax adviser with regard to your individual situation. Use of the information contained in this Web site is at the sole choice and risk of the reader.

Estate Tax Mess from Congress Inaction (Forbes)

Taxes
Congress Throws Estate Plans Into Disarray
Ashlea Ebeling, 12.17.09, 7:45 PM ET


Barring a last-minute political deal, the federal estate tax is set to disappear as of Jan. 1, 2010--for just one year. Democratic leaders of Congress are vowing to resurrect the tax retroactively sometime next year, but the impending lapse has estate planners in a tizzy. They worry the lapse could turn into a nightmare for some families.

"We may have to change every other client document," laments Carol Harrington, the head of the Private Client Group at McDermott Will & Emery.

The one-year repeal of the estate tax has been a part of the law since the Bush tax cuts were passed in 2001. In 2011, when those tax cuts expire, the estate tax will come roaring back to life with a $1 million per estate exemption from tax and a 55% top rate. By contrast, for those dying in 2009, $3.5 million of each estate is exempt from federal tax and the top estate rate is 45%.

While planners have bemoaned the uncertainty since 2001, few believed the politicians would be reckless (or deadlocked) enough to let the tax expire and then come back. They always assumed there would have to be some sort of a political deal before time was up.

"I've never seen Congress do anything so stupid," says Harrington. "The uncertainty is paralyzing. We were not cynical enough."

You might think heirs of those who die between Jan. 1 and the signing of a new estate tax law will be in luck. That's why there have been jokes about 2010 being the year to "throw mama from the train" or to send Dad hunting with Dick Cheney.

But the reality is that the families of those who die during the lapse--including those who aren't so wealthy--may not save any tax and could face a real mess. "Beneficiaries will deal with uncertainty for years," warns Kaye Thomas, a tax lawyer who opines on tax issues at his Web site, fairmark.com. "Having a brief period when the estate tax doesn't apply will almost surely lead to questions as to whether wills and trusts drafted under the assumption that the tax would remain in force truly reflect the intent of the decedent," he adds.

An unlimited amount can be left to a spouse tax-free. So estate planning documents drafted for couples often include formula clauses designed to preserve the estate tax exemption of the first spouse to die. But those clauses could spell trouble during the lapse.

Here's how one such clause might backfire: A man has $6 million in net worth and his will gives his children from his first marriage the "exemption" amount with the rest going to his second wife. If he dies in 2009, when the exemption is $3.5 million, wife No. 2 is left with $2.5 million and the $3.5 million going to the kids is exempt from estate tax. Sounds fair and tax-savvy.

But if the man dies on Jan. 1, his will could be interpreted to leave the entire $6 million to his children with his widow left out in the cold. Imagine the family feuds--and litigation.

Even if the family gets along, and with no second-marriage issue, a will that unintentionally transfers all assets to the kids could create huge problems, including incurring extra state estate taxes (23 states and the District of Columbia have their own estate taxes).

In addition, if Congress reinstates the estate tax retroactively, some heirs of those who die during the no-estate tax time period are likely to put up a fight instead of paying big bucks in estate tax. "If there's a significant estate, you're going to have litigation," predicts Donald Hamburg, an estates lawyer in New York City.

The question for the courts would be: "Is the retroactive estate tax an unconstitutional ex post facto law?" To be sure, a constitutional challenge is a long shot. Taxpayers sued and lost on whether it's constitutional to retroactively increase the top estate tax rate in Nationsbank of Texas v. U.S. In that case, a woman died in March 1993, when the estate tax was 50%, with a $28 million estate. But as part of the 1993 budget deal, Congress later raised the rate for 1993 deaths retroactively to 55%. Her heirs sued over the extra tax, took it up to a Court of Appeals and lost. They were denied a hearing by the U.S. Supreme Court.

Still, the retroactive imposition of a tax--as opposed to a retroactive tax rate increase--is arguably different, says Blanche Lark Christerson, managing director at Deutsche Bank Private Wealth Management.

Heirs would have to wait until the constitutional issue is resolved in the courts before they get their inheritances. "It certainly will mean that inheritances will be delayed in whole or in part," says Linda Hirschson, an estate lawyer with Greenberg Traurig in New York.

As a practical matter, people can take the position that the tax is retroactive and they're not going to fight it, or they can take the position it's not retroactive and gear up for a fight with the IRS and later in the courts. If they take the latter position, they'd better keep funds in the estate until things have cleared up, Hirschson says.

While only perhaps 5,500 estates over $3.5 million would have a tax problem with the retroactive imposition of the estate tax, tens of thousands of smaller estates still face a logistical and tax mess during the period the law has lapsed. As part of the current law, during the one year that the estate tax disappears, so too does a provision which gives all inherited assets a "step-up" in basis to their value at the time of the owner's death. (Step-up means heirs can sell right away without owing any capital gains taxes.)
Instead, for the one year of the estate tax lapse, only the first $1.3 million in assets gets a step up in basis. That means heirs of some estates larger than that will have to pay lawyers and accountants extra to figure out which assets to include in the $1.3 million. Moreover, they may not even know what the original cost of various assets was.

Harrington notes that if there's a surviving spouse, he or she can get an additional $3 million of assets that have been stepped up. So in theory, some estates might be able to shield up to $4.3 million from capital gains, depending on how an estate plan is drafted.

Still, the loss of step-up is a key reason planners assumed the politicians--if they wanted to keep their jobs--would change the law before 2010. Congress actually repealed step-up once before, but never allowed the provision to take effect because of the outcry from families, lawyers and accountants.

With all these problems there is a potentially huge planning opportunity, says Hamburg.

Along with the repeal of the estate tax is the repeal of the so-called "generation-skipping tax" (GST), a stiff extra tax that applies to transfers to grandchildren and others, which is designed to limit multigenerational gifts that skip a generation of tax. Wealthy grandma can make significant gifts to grandchildren using multigenerational trusts, paying a gift tax (which isn't repealed) but no GST. "Lawyers are talking about setting up these trusts in January," Hamburg says. It's not clear if this will work if Congress reinstates the GST retroactively and it is held to be constitutional.

Where will this all settle? An estate tax with a $3.5 million per-person exemption ratcheting up to $5 million over 10 years, and a 35% top rate (or perhaps a top rate tied to the top personal income tax rate), predicts Dean Zerbe, national managing director with the AlliantGroup and former tax counsel to Sen. Charles Grassley, R-Iowa.

"This is a classic football exercise--you get politicians on both sides posturing," Zerbe says. "The biggest winners out of this are the estate tax attorneys. It's a sad day for everybody else."

Obama Kids Tax Shelter 529 College Plan (WSJ)

FAMILY FINANCES APRIL 18, 2009

Obamas Pump Up College Savings
Parents Make Big Upfront '529' Investment for Their Daughters' Tuition
Article

By JANE J. KIM
Malia and Sasha Obama's college education appears to be taken care of in a massive contribution that the president and first lady made to a "529" college-savings plan in 2007.

But like everyone else, they have likely suffered big losses.

According to their 2008 tax returns, the Obamas took advantage of a unique feature of 529 plans that allows account owners to front-load five years' worth of contributions, $240,000 in total for the two girls. They did so without triggering gift taxes -- now levied on any gift exceeding $13,000 a year. Form 709, the federal gift-tax form, shows that Barack and Michelle Obama made equal contributions of $120,000 each, or $60,000 to each of the two children in 2007.

Senate disclosure forms released last year show that the contributions were made to Illinois's adviser-sold Bright Directions College Savings Program, in two age-based growth portfolios, which are designed to become more conservative the closer the child is to attending college. Assuming that the Obamas haven't changed their investments, one of those portfolios has lost roughly 35% in the past year through March, while the other one is down about 27%.


The filings offer a peek into how the Obamas are planning to pay for college for their daughters, Malia, now 10, and Sasha, seven. College tuition has soared in recent years, with average tuition and fees at private four-year colleges hitting $25,143 for the 2008-2009 academic year, according to the College Board. Meanwhile, average in-state tuition and fees at four-year public universities jumped to $6,585, up 6.4% from the previous year.

In recent years, tax-advantaged 529 plans have become a popular college-savings vehicle for many parents. In a 529 plan, savers put after-tax dollars into an account that typically offers a wide range of mutual funds.

Distributions and earnings are tax-free as long as they are used for higher education. Investors can invest in any plan, although they may get an additional state tax break if they invest in their own state's plan. The Illinois 529 plan, for example, offers a state-tax deduction for contributions.

A spokesman for the White House confirms that a payment was made in 2007 and that the payment, for reporting purposes, will be prorated over five years.

By front-loading five years' worth of contributions, the Obamas also are cutting possible future taxes on their estate since they have gotten $240,000 -- and any future appreciation on that amount -- out of their estate, says Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants, or AICPA.

To be sure, not every family has the means to sock away as much money into 529 plans. The five-year gift election is typically used by wealthy individuals or grandparents who want to help pay for college while reducing their taxable estates, says Joe Hurley, founder of Savingforcollege.com. "Most parents don't have that kind of money to put in all at once."

While the Obamas' investments are down with the bear market, there is a silver lining for investors in these plans. Investors who are underwater can liquidate the plan without penalties or taxes. Losses can be claimed as a miscellaneous itemized deduction, which can help reduce investors' taxes to the extent those deductions exceed 2% of their adjusted gross income, Mr. Hurley notes. Those who are in the alternative minimum tax, however, are out of luck since miscellaneous itemized deductions aren't usable under the AMT.

Write to Jane J. Kim at jane.kim@wsj.com

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