Senate Dems Play Hardball with Tax Battle

As sent to the floor, the bill would only extend current marginal income tax rates for individuals earning less than $200,000 a year, $250,000 for couples. It would also reinstate the personal exemption phaseout and overall limitation on itemized deductions that apply to high-income households.

The bill is sponsored by Sen. Harry Reid, D-Nev., Senate majority leader,

Currently, as amended in late 2010 for 2011 and 2012, the Bush tax cuts establish a $5 million exemption and a maximum 35 percent tax rate.

It also indexed the estate tax exemption, starting this year, raising it to $5,120,000 for 2012. The 2010 amendments made estate tax policies more generous by unifying the estate and gift taxes.

For example, Andrew Katzenstein, a partner in the Personal Planning Department with Proskauer in Los Angeles, said that if the so-called "Bush-era tax cuts" expire at the end of the year, income tax rates for the highest-earning individuals and families will rise from 36 to 39 percent, an eight percent increase."

But, by comparison, if the estate tax provisions are allowed to expire, there will be a 60 percent drop in the exemption and a 20 percent gross increase in the tax rate.

Doug Siegler, a partner at Sutherland Asbill & Brennan in Washington and a member of Sutherland's Tax Practice Group, acknowledged that the decision to remove the estate tax provisions from S. 3393 appeared to be part of a new Democratic Party strategy to play hardball on tax issues.

"Although no one can predict how the looming expiration of the so-called 'Bush-era tax cuts' will ultimately play out, the withdrawal by Reid of the estate and gift provisions from his middle class tax bill would seem to indicate that there will be a separate fight on the estate and gift tax," Siegler said.

He explained that a number of Democrats felt "stung" by the concession in 2010 that allowed an increase in the estate and gift exemptions to $5 million and a drop in the top tax rate of 35 percent, "and they may not be willing to make the same concession on these issues this time around."

The bill as scheduled for floor action would also establish the top rates for dividends and capital gains at 20 percent for 2013.

The bill would also extend the American Opportunity tax credit, the child tax credit, and the earned income tax credit for another year, as well as the Section 179 expensing provisions for businesses. It also would provide another one-year "patch" covering 2012 from the alternative minimum tax.