Thursday, January 1, 2009
Live long and prosper!
Happy New Year!
And congratulations to Edgar Rafael Moreno and his parents in Passaic, NJ. Edgar was born at one second after midnight and made the newspaper headlines around the country as a candidate for the first baby born in 2009 in the US. Congratulations also to the parents of Keegan Croucher, the first baby born in 2009 in the Albany Times Union circulation area (pictured above in photo by TU photographer Paul Buckowski.)
Edgar's parents missed out on a whole year's worth of child-related tax benefits on their 2008 tax return to which they would been entitled if he'd arrived just 2 seconds earlier. Keegan's parents missed out on those tax benefits by a little over 3 minutes. (On the other hand, the Beechnut Baby Food company is providing a nice consolation prize to Edgar, Keegan, and other babies born on January 1!)
The "witching hour" for many other tax provisions happened at midnight last night. For example, taxpayers who plan to claim itemized deductions on their 2008 tax returns needed to make sure their charitable donations, mortgage payments, or estimated state and local income tax payments got postmarked before midnight yesterday. A wedding or divorce yesterday could affect filing status for the 2008 tax return.
A wealthy person on his deathbed last night could have saved up to $675,000 in estate taxes by waiting until after midnight to die, because of provisions of the estate tax law that went into effect at midnight. Very wealthy people who manage to hang on and stave off death until January 1, 2010 might save even larger amounts of estate taxes if the provisions of current law slated to abolish the estate tax altogther in 2010 remain in force.
However, if they manage to live until January 1, 2011, all bets are off, since the estate tax is scheduled to revert to its stingier 2001 level at that time. This legislation provides some troubling economic incentives. So perhaps, the reason for the title of this post should be modified to read: Live long and prosper (but not too long!) However, many policywatchers expect Congress to change the estate tax law before 2011, so hopefully, physicians and family members hovering by a loved-one's deathbed will not be faced with troubling tax concerns as the clock ticks towards midnight of December 31, 2010. The tax benefits to pulling the plug on a respirator a few seconds before midnight on 12/31/2010 vs. a few seconds afterwards are quite macabre to contemplate.
I previously blogged about an economic study of the effect of tax incentives on the timing of births. Two other economists, Wojciech Kopczuk and Joel Slemrod, have studied the effect of tax incentives on the timing of deaths in a paper called "Dying to save taxes", published in the Review of Economics and Statistics in 2006. They estimate that a $10,000 tax break might be enough to change the relative probability of dying in the period before vs. after the tax break by as much as 1.6%. (However, they concede that they can't be sure how much of that effect is due to the timing of the actual death or how much might be due to "doctoring" of the death certificate by an accommodating physician who fills out the death certificate.)
The estate tax is unlikely to affect any of our VITA site clients, since it only applies to taxpayers with very large estates. (A taxpayer who died with an estate worth less than $2 million yesterday would face no estate tax. In 2009, the exempt amount rises to $3.5 million. Under the provisions slated to take effect, there will be no estate tax for those who die in 2010, and the exempt amount will revert to $1 million in 2011. It should also be noted that taxpayers can pass on unlimited tax-free bequests to their spouses and to charitable organizations.)
But it is still interesting to see how taxes can potentially affect almost every aspect of decisionmaking, including the timing of births and deaths, marriages, divorces, labor-leisure choices, savings and investment decisions, college attendance, charitable donations, cash wages vs. employer paid health insurance choices, and entrepreneurship decisions. We will talk more about these effects in our winter term course.