Happy New Year to all of you !

Hopefully, the new year will be both prosperous and free of further
restrictions on our liberties, but I'm somewhat apprehensive about the
latter.

With a Congress controlled by the Democrats, the prospects for
beneficial tax and economic legislation isn't favorable --
particularly in the international part of the tax law. At the best,
Bush might be able to prevent any adverse changes in the laws with the
veto, but the Democrats can make that very difficult by including
unfavorable tax legislation with other bills that are essential for
Bush to approve.

I make no claim to having a cyrstal ball or a good track record at
making prognostications, but here are a few personal observations
about what we might expect in the next two years.

Regarding the reduced personal income tax rates, it seems unlikely
they will be repealed with new laws. The expansion of the 10% bracket
clearly favors lower income taxpayers and is likely to be retained for
at least the next two years. (It is scheduled to expire after 2010.)
The expansion of the 15% rate bracket for married couples is scheduled
to expire after 2010 but it doesn't seem likely to be a target for the
Democrats who claim to be advocates of the middle class and the poor.

The increased exemption for the alternative minimum tax is scheduled
to expire after 2010 and if the Democrats are still in control of the
Congress, it probably won't be extended. On the other hand, repeal of
the expanded exemption is unlikely in the next two years.

The estate tax is due to expire in the year 2010 but will be
automatically re-instated in 2011 to the levels of the 2002 rates and
exemptions if it is not extended. Some of the Democrats may attempt to
change the law before then to reduce the exemption and increase the
rates, but I suspect changes in the estate tax won't even get to the
President's desk in the next two years. After 2008, it will depend on
the shift in power resulting from the 2008 elections. Some speakers at
estate planning conferences have suggested that the eventual outcome
will be a compromise to keep the estate tax but with a much larger
exemption than in the past. They speculate that we may end up with an
exemption amount of $2 to $3 million.

What does seem to be at risk are some of the international tax rules.

High on that list is an attempt to impose a tax on unrealized gains of
assets for those who expatriate. (A similar law exists in Canada.)
Some of the Democrats want to repeal the foreign earned income
exclusion, but that will be resisted with extensive lobbying by large
corporations, by the CPAs and by the tax bar. There are proposals in
the Congress to require tax preparers to be more "diligent" in seeking
information about clients who have foreign accounts or foreign trusts,
but that is being resisted by the tax accountant and tax law
organizations.

Some influential members of Congress don't seem to believe that the
present laws are adequate to deter U.S. taxpayers from evading taxes
with foreign trusts and foreign corporations, so they are proposing
heavy penalties on promoters. The definition of a promoter would
include anyone who is involved in any way in helping a taxpayer to
establish a foreign financial account, a foreign trust or a foreign
corporation. Needless to say, the lawyers and accountants are strongly
opposed to such rules. If these laws were passed it would have the
effect of imposing a gag order on financial and legal advisors.
Without the benefit of informed advice, taxpayers would end up relying
on the advice of foreign promoters who are not subject to our laws and
are largely unconcerned about helping U.S. persons to commit tax evasion.

The members of Congress who are the proponents of these restrictive
rules talk about preventing people from evading taxes because it
invokes some sympathy from the media and from the public. But I
suspect the real reason is because they are concerned about an
escalation of the movement of money from the U.S. to other countries
and also of a movement of investors, entreprenuers and even large
corporations to more favorable political climates.

Hopefully, none of these adverse changes will occur in the next two
years. In my humble opinion, the best we can realistically hope for is
a do-nothing Congress.

Vern Jacobs