It’s That (Ending) Time of Year Again: Some Taxing and Not-so-Taxing Thoughts for Yearend

It’s That (Ending) Time of Year Again: Some Taxing and Not-so-Taxing Thoughts for Yearend

By Jeffrey G. Moore

As yet another year comes to yet another surprisingly quick close; here are some things to consider before you ring in 2006.


No, we’re not talking about the estate tax. More to come on that below. What we are talking about is a unique, one-time charitable deduction opportunity that ends this calendar year. Under current law, the maximum amount of cash contributions deductible in any one year is 50% of Adjusted Gross Income (AGI). Any cash gifts in excess of this limit may be carried over the next five years. In the wake of Hurricane Katrina, however, and in an effort to encourage disaster relief contributions over and above one’s typical annual charitable contributions, Congress has temporarily suspended the 50% of AGI limitation and raised the cash contribution limit to 100% of AGI. But this applies only to outright cash donations made between August 28 and December 31, 2005. The target charity is not required to be engaged in Katrina relief.

While there may be relatively few taxpayers that this temporary suspension benefits on the strict cash side, there is another element of this suspension that may be appealing for tax-deferred retirement accounts. The assets in such accounts are subject to income taxation on withdrawal. But under this special law for 2005, withdrawals from your retirement accounts will be added to your AGI and are therefore fully deductible. In other words, it would be possible to essentially eliminate any tax on withdrawals intended for charities. This is a significant planning opportunity for those who have long hoped to transfer their retirement accounts to charity during life but without realizing the income. One caution: An increased AGI may affect the availability of itemized and other deductions.


Hurricane Katrina again takes center stage. Until recently, and arguably until Hurricane Katrina hit, it seemed that there was the very near and real possibility that the federal estate tax could be repealed. But the word from Washington politicians appears to be that efforts to completely repeal the federal estate tax have been “indefinitely postponed” (translation: abandoned). Nevertheless, we will keep our eyes on Congressional efforts to significantly increase the federal estate tax exemption. Until Congress does take action, here’s a quick summary of the current lay of the land – federally speaking.

Effective January 1, 2006, the amount that an individual can pass at death without federal estate taxation will increase from $1.5 million to $2.0 million. In 2009, this exemption is increased to $3.5 million. In 2010, there is no federal estate tax for individuals dying in 2010 – but don’t hold your breath. Starting in 2011, we go back down to a $1 million exemption. Again, while the federal estate tax may never go away completely, there will most likely be a retooling of some sort. Many expect that the retooling will ultimately set the federal exemption between $3.0 and $5.0 million.


Hopefully it’s old news that Oregon has implemented its own estate tax in addition to the federal estate tax. There may still be a lot of political talk in D.C., but in Oregon the estate tax matter seems pretty well-settled. Effective January 1, 2006, the amount that an individual can pass at death without Oregon imposing its estate tax is $1.0 million. This is a slight increase from this year’s $950,000 exemption. Unlike the rising federal exemption, Oregon’s exemption is indefinitely capped at $1.0 million starting in 2006. If you haven’t done so already, a good year-end plan is to update your estate plan in consideration of Oregon’s tax.

Unlike the feds, Oregon does not have a gift tax. So, even though taxable gifts (i.e., gifts in excess of your “annual exclusion” – see below) are brought back into your estate for federal estate tax purposes, gifts made prior to your death are not included in your estate for Oregon estate tax purposes. Another caution: Gifting low-basis assets in an attempt to save Oregon estate taxes could cause a more significant capital gains tax issue when your donee sells the assets. This is because a combined federal/state capital gains rate of 24% may exceed Oregon’s marginal estate tax rate (top marginal rate of 16%).


The federal life-time gifting exemption is currently capped at $1.0 million. That means that any “taxable gifts,” or gifts in excess of your annual or unlimited exclusions, are immediately taxed if they exceed $1.0 million. The taxable gifts under $1.0 million will simply reduce the amount that can pass estate-tax free upon your death – they essentially “use up” your estate tax exemption.

On the other hand, “annual exclusion gifts” are gifts that the law turns a blind eye to. Gifts under the annual exclusion amount are simply ignored for gift tax purposes. Although many still believe the annual exclusion limit is $10,000 per donee per year, the annual exclusion for 2005 is actually $11,000 per donee. Just a reminder if you plan to make year-end annual exclusion gifts. And if you’re already planning for next year, the annual exclusion amount is increasing to $12,000 per donee per year starting in 2006. Annual exclusion gifts can be made directly to individuals, or to special Irrevocable Trusts that hold the assets for the long-term benefit of your beneficiaries.


Although the Health Insurance Portability and Accountability Act (“HIPAA”) regulations have nothing to do with taxes, the ramifications are equally important with respect to health care issues.

The regulations have put health care providers under strict privacy rules making it very challenging for family members to obtain necessary health care information. As a result of the finalized HIPAA regulations, the Saalfeld Griggs Estate Planning Group has drafted HIPAA Authorizations and new language for the Advance Directive, making it easier for family members to obtain health care information when necessary despite the regulations.

Your estate planning, whether for year-end or for the years to come, is unique. Given the significant tax, economic, and asset protection planning law changes that have taken place in recent years, appropriate planning and periodic updates are critical in keeping your goals and wishes on track. Please call us if it’s time for more planning in your estate plan.