A blog post

THE ESTATE TAX FOR 2010 – IS IT REALLY DEAD?

Posted on the 05 January, 2010 at 10:29 pm Written by in Taxes

The estate tax has been enacted four times in American history. It has been repealed three times.

The first estate tax was repealed by Thomas Jefferson, who forcefully defended a person’s right to leave one’s property at death to “whom he pleases.”

In 1862 the estate tax was imposed a second time to collect funds for the Civil War. It was repealed in 1870.

In 1898 the estate tax was imposed again to collect funds for the Spanish-American war, and it was repealed in 1902.

The estate tax was enacted a fourth time in 1916 to help pay for WWI. World War I ended over ninety years ago, but Congress forgot.

The estate tax has been “repealed” again in 2010, but not really.

What are we talking about? The estate tax is the tax on the net worth of a decedent. The government spots a certain amount (the “unified credit”). If your net worth is less than this amount, then you can stop worrying about the estate tax. If you are worth more, well, then you might want to worry – at least a little bit.

 Look at the following:

                                                                     Maximum

    Year                Exemption                    Tax Rate

 2009                 $3.5 million                   45%                 

2010                 Tax Repeal                    0%

2011                 $1 million                      55%

What’s the problem? Well, if Congress does nothing, the estate tax goes away in 2010 and then returns in 2011. That’s not all, though. The amount the IRS spots you – the unified credit – goes down, which is bad, and the maximum tax rate goes up, which is also bad.

What if you die in 2010? First, bad for you. Second, there is a dirty tax secret buried here. Congress has substituted a capital gains tax for the estate tax.  Congress says that you have to carryover the decedent’s basis to the beneficiary. Say that dad bought those shares of P&G at an average of $4.12 per share. The good news is that you have received shares in P&G. The bad news is that your basis in the shares in $4.12 per share rather than market value when dad passed away. You have capital gain taxes to pay when you sell those shares!

Congress realized this is unfair, so they allowed the estate to use market value rather than dad’s cost – up to a limit.  The estate can mark-up enough assets to eliminate $1,300,000 of capital gains. Note that this is not the same as saying that $1,300,000 of assets are marked-up to market value.

There is another mark-up – this one for $3,500,000 – for assets transferred to the surviving spouse.

Hold on though. Congress is intent on revising this law in 2010 – and making the change retroactive to January 1, 2010. What will happen? Will it happen? I don’t know, but we are expecting something to happen.