Controversial ‘Death Tax’ to Expire Thursday
Benjamin Franklin's maxim that "nothing is certain but death and taxes" remains true. But a congressional stalemate has left the federal estate tax, the levy on assets left to heirs, in doubt for at least part of 2010.
The tax is poised to expire Thursday, though the House and Senate are expected to pass a reauthorization, possibly retroactive to Jan. 1, next year.
In the meantime, what might seem like a potential tax savings has become a guessing game for taxpayers, accountants, estate planners and tax lawyers. The impasse also could mean capital gains taxes on more inheritances.
"No one believed that Congress in its ultimate wisdom, with all the deficits looming, with a recession and two wars... would ever allow the estate tax to lapse. But that's what's happening," said Martin Press, a tax attorney in Fort Lauderdale. "It's created great uncertainty."
The seeds of the impasse were sown in 2001, when Washington enacted legislation that gradually raised the tax's exemption ceiling while also cutting the tax rate.
At the time, estates valued at $675,000 or higher were subject to the tax. And they were taxed at a rate of 55%. This year's exemption threshold is $3.5 million, and the tax rate is 45%. The levy brought in an estimated $26.5 billion in gross collections in 2008, according to the IRS.
The levy is set to disappear for 2010. Barring any agreement to extend or change the 2001 law, the tax is scheduled to resurface in 2011 at a rate of 55% on estates valued at $1 million or higher.
During the time the tax is not in effect, it would be replaced by a 15% capital gains levy on inherited property that's sold. That could be a deep bite, said Michael Halloran, president of the National Association of Estate Planners and Councils.
For instance, an heir who collects $450,000 selling an investment property originally bought for $50,000 could face capital gains tax on the full $400,000 increase in value. Under the expiring system, that $450,000 sale wouldn't trigger capital gains tax if the market value at the time of the donor's death also was $450,000.
But estates would be allowed to use current values to save at least $1.3 million of assets from capital gains, said Mitchell Gans, a Hofstra University law professor.
"A lot of middle-income Americans could end up being affected by a tax they never expected," said Marguerite Mount, managing director of the Mercadien Group, a family of asset management, accounting and technology firms in Hamilton, N.J.
Halloran said any move to make a new estate tax retroactive would likely prompt lawsuits. But Paul Caron, associate dean at the University of Cincinnati law school and editor of the TaxProf Blog, said a 1994 Supreme Court ruling upheld the constitutionality of a retroactive tax law so long as it has a rational purpose, is not arbitrary and is enacted without excessive delay.