Daily Tax Update - July 31, 2006

July 31, 2006

HOUSE APPROVES PENSION BILL, ESTATE TAX AND TAX EXTENDERS:
In a rare Saturday session before adjourning for its August recess, the House approved H.R. 5970, the Estate Tax and Extension of Tax Relief Act of 2006. In addition to the estate tax relief, the bill would extend through 2007 a number of popular tax provisions such as the Work Opportunity Tax Credit, the R&D tax credit and the state sales tax deduction. The bill would also make permanent certain changes made by the Tax Increase Prevention and Reconciliation Act of 2005, including the provision that applies the active trade or business rules of section 355 on an affiliated group basis. Finally, the bill would increase the federal minimum wage from $5.15 per hour to $7.25 over three years. The Senate is expected to approve the bills this week.

The estate tax bill would provide for:

  • Reunification of the estate, gift and generation skipping transfer taxes, giving individuals greater flexibility to make estate planning decisions during life.
  • Increase of the estate and gift tax exemption amount to $5 million per person (indexed for inflation). The $5 million per person exemption amount is fully phased-in effective January 1, 2015.
  • Reduced estate and gift tax rates. Amounts up to $25 million (indexed for inflation) will be subject to tax at the capital gains tax rate (currently 15 percent, set to increase to 20 percent in 2011 unless extended). Amounts in excess of $25 million (indexed for inflation) or more will be subject to a phased-in reduced rate of tax of 30 percent. The 30 percent tax rate is fully phased-in effective January 1, 2015.
  • Portable spousal estate and gift tax exclusion to allow married couples to take full advantage of the $5 million per person exemption amount (indexed for inflation) by carrying over any unused exemption to the surviving spouse, subject to the phase-in of the exemption amount.
  • Additional information on the estate and extenders bill can be accessed here.

The House also passed the Pension Protection Act (H.R. 4), which incorporates tax provisions that will enhance retirement security for millions of Americans. Significant retirement features of the bill include provisions to:

  • Revise the pension funding rules that (1) require faster funding over 7 years and include use of new measurement criteria (interest based on modified yield curve, with temporary use of the corporate bond interest rate through 2007), (2) limit the use of credit balances in determining funding obligations, and (3) establish new rules and limitations for “at risk” plans (including a limitation on funding executive compensation), with special rules for airlines and certain other entities (defense contractors).
  • Establish new reporting and disclosure rules for both single employer and multiemployer plans.
  • Set new standards for cash balance plans, including limits on wearaway provisions for new plans, and requirements for interest crediting and vesting for all plans effective in 2008, with no inference language governing current cash balance plans.
  • Provide special rules for plans that allow investment in company stock, including a requirement that participants be allowed to divest their accounts of company stock after 3 years (certain of these rules do not apply to ESOPs).
  • Make permanent certain EGTRRA provisions, such as the limits on elective contributions and allowance of catch up contributions.
  • Establish a safe harbor for nondiscrimination testing for 401(k) plans that provide for automatic enrollment of participants and meet certain other requirements.
  • Create prohibited transaction exemptions for certain investment advice arrangements.
  • Provide a variety of special withdrawal and distribution rules for certain military and government employees.
  • In addition, a provision of the bill affecting corporate owned life insurance establishes certain requirements (e.g., notice and consent of the insureds) in order for a holder of employer-owned insurance policies to exclude amounts exceeding premiums from income under section 101 of the Code. The provision also establishes new reporting requirements for such arrangements.
  • For additional information, contact Anne E. Moran - amoran@steptoe.com
  • Additional information on the pension bill can be accessed here.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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