In One Hand and Out the Other: An Overview of Recent Federal and Illinois Tax Legislation Affecting Individuals and Corporations
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance, Reauthorization, and Jobs Creation Act of 2010. Below are some of the numerous changes made by the act:
The amount that can pass at death free of federal estate tax was raised to $5 million for decedents dying in 2011 and 2012 (with an inflation adjustment for 2012).
For 2011 and 2012, the amount (in excess of annual exclusion gifts, which remains $13,000 per donee in 2011) that a donor can gift during lifetime without incurring a gift tax has been raised to $5 million.
The amount that a donor or a decedent can pass to grandchildren or more remote descendants (outright or in trust) free of generation-skipping transfer tax was increased to $5 million in 2011 and 2012.
The federal estate, gift and GST tax rates were lowered to 35% for decedents dying in 2011 and 2012.
For decedents dying in 2011 and 2012 who do not fully utilize their estate tax exemption, their executor may elect to transfer any unused exemption to the surviving spouse. This portability, however, expires on December 31, 2012.
The top federal income tax rate has been maintained at 35% (rather than increasing to 39.6% as had been scheduled under prior law). The 15% long-term capital gains rate, which also applies to the taxation of dividends, has been retained.
The employee portion of payroll taxes has been temporarily reduced from 6.2% to 4.2% in 2011.
Instead of allowing Illinois residents to spend their federal tax savings to spur the economy as Congress had desired, the state legislature adopted a tax hike on January 12, 2011. Less than a month after the federal income tax cut went into effect, Governor Quinn signed the measure, which includes the following major provisions:
Illinois has also reinstated its estate and generation-skipping taxes, only allowing for a $2 million exemption (but again allowing marital and charitable deductions, in addition to deductions for expenses and taxes). Thus, in 2011 and 2012, a decedent can pass $5 million to descendants free of federal estate tax, but would owe $352,158 in Illinois estate taxes. Passing $3 million to descendants would amount to an Illinois estate tax cost of $167,279.
Tax rates for individuals, estates and trusts have been increased (retroactively to January 1, 2011) from the previous rate of 3%:
5% for 2011-2014;
3.75% for 2015-2024; and 3.25% for 2025 and thereafter.
The combined total tax rates for corporations (income tax plus the 2.5% Illinois replacement tax) have been increased (retroactively to January 1, 2011) from the previous rate of 7.3%:
9.5% for 2011-2014 (7% income tax plus 2.5% replacement tax);
7.75% for 2015-2024 (5.25% income tax plus 2.5% replacement tax); and
7.3% for 2025 and thereafter (4.8% income tax plus 2.5% replacement tax).
For owners of flow-through entities (e.g., S corporations, partnerships and trusts), the 1.5% Illinois replacement tax continues to apply.
If the Illinois legislature fails to comply with prescribed spending limits, the pre-2011 income tax rates for individuals, estates, trusts and corporations will automatically be reinstated. (Of course, the legislature has the power to adjust these "limits," thus making this trigger unlikely.)
In light of these significant federal and state tax changes, both individuals and businesses should review their circumstances and plan for the divergent federal and Illinois taxes. For more information on how these changes may affect your situation, as well as available planning alternatives, contact your Much Shelist attorney or a member of the firm's Wealth Transfer & Succession Planning group.