Following his speech to a joint session of Congress, President Obama introduced provisions of the American Jobs Act of 2011.  The $447 billion bill is designed to increase employment and have a positive impact on the economy.

A major feature of the plan is to reduce employees' Social Security payroll taxes in 2011 from 6.2% to 3.1%.  Employers would also receive the same reduction on the first $5 million in employee payrolls.

The American Jobs Act also includes tax credits for hiring injured veterans, long-term unemployed workers and "wounded warriors."  Businesses would be permitted to expense 100% of most acquired property and there would be grants for infrastructure and other purposes.

The Obama administration this week released its proposed methods for offsetting the $447 billion cost.  Approximately $400 billion of new revenue will come from reducing itemized deductions for upper-income Americans.  Those taxpayers in the 33% and 35% tax brackets would have reduced deduction benefits for state and local taxes, mortgage interest and charitable deductions.  Even though they pay tax at the higher brackets, their tax savings from these deductions will be limited to the 28% bracket under the White House proposal.

House Majority Leader Eric Cantor (R-VA) responded to the American Jobs Act on September 13.  He stated, "I will say that there certainly were areas that the President laid out that I believe we can work on together."  He indicated that the House and the President had areas of agreement on tax relief for small businesses.  He also believed that they could agree to reduce regulations, particularly for infrastructure projects.

However, Leader Cantor was quite concerned about the impact of reducing the deduction value of charitable gifts for upper-income taxpayers.  He stated that the White House "tax proposals are going to impose taxes on charitable contributions and in fact impact at least 40% of tax-deductible charitable contributions.  The question is why would we want to put an impediment in the way of the charities accessing funding when the charities are the ones out there helping people in need right now?"

Editor's Note: The American Jobs Act will now enter the legislative process in the House and Senate.  It is also likely to be considered by the Joint Select Committee on Deficit Reduction.

Will Supercommittee Reform Taxes?

The six Democrats and six Republicans on the Joint Select Committee for Deficit Reduction are engaged in regular meetings.  They are tasked with finding a minimum of $1.2 trillion and potentially $1.5 trillion or more of savings in order to reduce the deficit.  It will require seven favorable votes on any plan for it to be submitted to Congress.

House Speaker John Boehner (R-OH) called this week for the supercommittee to take up the challenge of reform of the tax code.  He suggested that a comprehensive reform would be important for the recovery of the economy.  However, Boehner also emphasized that he felt reform should be revenue-neutral.  He suggested that there should not be tax increases because "tax increases destroy jobs."

Sen. Carl Levin (D-MI) forwarded a proposal to the supercommittee with seven specific tax provisions.  These include the following items.

1.  Offshore Tax Abuse – Reduce the shifting of income to tax havens overseas with new legislation.

2.  Corporate Stock Options – Insure that corporations may not take deductions greater than the actual book expense for the stock options.

3.  Carried Interest – Require hedge fund managers to pay ordinary income tax on earnings rather than the lower capital gains tax paid under their partnership structures.

4.  Derivative Investments – Eliminate the "blended rate" of part ordinary income and part capital gains and tax at the higher ordinary rate.

5.  Capital Gains – Return the long-term capital gains tax rate from 15% to the prior 20%.

6.  Income Taxes – Increase the 35% top bracket back to the 39.6% rate of the late 1990s.

7.  Electronic Tax Liens – Replace the present paper system with electronic liens to facilitate collection by the IRS.

Six-Month Estate Tax Extension

In Notice 2011-76; 2011-40 IRB 1 (13 Sept 2011), the IRS announced a six-month extension for filing estate tax returns and paying estate tax for 2010 decedents.

The IRS Form 706 Estate Tax Return is normally due nine months after the date of the death.  Most executors have typically requested a six-month estate tax return extension.  However, the tax normally is required to be paid within nine months of death.

Under this Notice, executors may file Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes and receive a six-month extension in both the filing date and payment of estate tax.  Executors for decedents who passed away from January 1, 2010 to December 16, 2010 will have their due date for filing returns and paying tax extended until March 19, 2012.  This is a recognition of the challenges executors and estate attorneys face in addressing the options for 2010.  The six-month extension will permit executors and attorneys a greater period of time to gather all of the relative documents and appraisals to file the estate tax return.

Executors of 2010 decedents with death dates from Dec. 17 to Dec. 31 who request an extension will have 15 months to file and pay estate taxes.

Most larger estates will make a Sec. 1022 election to opt out of the estate tax.  While they will not pay estate tax, the larger estates will then be subject to carry-over basis rules.  The larger estates will be required to file IRS Form 8939.  Fortunately, the Notice changes the Form 8939 filing date from November 15, 2011 to January 17, 2012.

Estates with values moderately in excess of $5 million may choose to file the estate tax return and pay a moderate estate tax.  In exchange for payment of the estate tax, they will receive a step-up in basis on most assets.  It may be beneficial to pay a modest or moderate estate tax and reduce future potential capital gains tax exposure.

Larger estates are much more likely to make the Sec. 1022 election out of estate tax.  However, these estates may need to gather extensive records to document the basis in the estate assets.  The IRS has still not released the final Form 8939, "Allocation of Increase in Basis for Property Acquired from a Decedent."  It is anticipated that this form will be released later this year.

Applicable Federal Rate of 2.0% for September – Rev. Rul. 2011-20; 2011-36 IRB 1 (18 Aug. 2011)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2011.  The AFR under Sec. 7520 for the month of September will be 2.0%.  The rates for August of 2.2% or July of 2.4% also may be used.  The highest AFR is beneficial for charitable deductions of remainder interests.  The lowest AFR is best for lead trusts and life estate reserved agreements.  With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable.  During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.