Weakened Estate Tax May Return in 2011-2012

The estate tax set to return in 2011 as part of President Obama's tax compromise

After a year of uncertainty over the future of the estate tax, we may soon get some clarity, though it may only last for two years.

On Monday, December 7, 2010, President Obama announced a compromise with Republicans on an extension of the Bush Tax Cuts. The compromise is said to include a two-year extension of the Bush-era tax cuts for all taxpayers, a 13-month extension of unemployment benefits, a 2% payroll tax cut, and a significantly watered down version of the estate tax.

The reported compromise will bring back the estate tax in 2011-2012 at a maximum rate of 35% with a $5 million exemption per person. These numbers are a significant reduction from the 55% maximum tax rate and $1 million exemption that would have gone into effect if Congress failed to act before January 1, 2011.

For those that have not been following the topic, the estate tax was repealed in 2010 as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, commonly referred to as the “Bush Tax cuts.” The Bush Tax cuts were part of a sweeping tax cut which gradually reduced income tax and the estate tax from 2001 through 2010. The Bush Tax cuts were set to expire on January 1, 2011.

Under the Bush Tax cuts, the estate tax rate was gradually reduced from 55% in 2001 to 45% in 2009.

In addition to lowering the tax rate, the number of estates subject to the tax was drastically reduced. Under the Bush Tax cuts, the amount that of an estate that is exempt from taxation was raised from $675,000 in 2001, to $3.5 million in 2009. The estate tax was fully eliminated in 2010.

By raising the exemption amount from $675,000 to $3.5 million, the number of taxable estates dropped from more than 50,000 in 2000 to fewer than 7,000 in 2009. In other terms, 2% of the estates were taxable in 2000, but in 2009, that number dropped to 0.025%. In 2001, 20 of 1000 estates were taxable. In 2009, only 3 of those 1000 were taxable.

The estate tax provision of Obama compromise is similar to an oft-criticized proposal brought by Senators Jon Kyl and Blanche Lincoln, which proposed the lowered estate tax rate (35%) and the higher exemption ($5 million).

Opponents criticize the estate tax as double taxation and an unfair levy that destroys family businesses. Proponents of the tax, such as Warren Buffet and Bill Gates, view the tax as essential to preserving meritocracy in the United States, while providing billions of dollars to the government. . bloomberg. Nov.28. The estate tax change is estimated to cost the government $68 billion in revenue over the next two years. The hill.com

If the terms of Monday’s compromise are approved by Congress, the estate tax changes will go into effect in 2011 and expire in 2012. The compromise is likely to be approved because of the looming deadline on all tax cuts. But members of the Democratic party vow to fight the estate tax provision and claim that it is a “bridge too far.” So there still may be changes coming.

The increased exemption amount would likely mean that more than 99.75 percent of the estates in the United States would not be subject to an estate tax. Some estate planners are already disappointed by the change because the compromise may have prevented a situation where many estates would have been subject to the tax.

However, even with fewer estates subject to the tax, there is still a significant need for estate planning. Estate planning can be used to avoid costly probate, disinherit relatives, refuse artificial respiration, name guardians for young children, provide for special needs children, and a host of other benefits.

Politics aside, the changes do provide clarity and should make estate planning easier for 99.75 percent of the population, which is probably a good thing for most, though it may be even better for that top 0.025%.

Image: CC licensed from Vincepal/Flickr]

References:

Needham, V. (2010, December 6) Obama announces accord on taxes. Retrieved fromhttp://thehill.com/blogs/on-the-money/domestic-taxes/132273-obama-announces-accord-on-taxes-

Donmoyer, R.J. (2010, November 28, 2010). Return of Estate Tax Looms as Final Impediment to Extending Bush Tax Cuts. Retrieved from http://www.bloomberg.com/news/2010-11-29/return-of-estate-tax-looms-as-final-impediment-to-extending-bush-tax-cuts.html

Klein, H. (2009, April 2) Do The Super Rich Have Enough Representation In The Senate? Let’s Ask Jon Kyl And Blanche Lincoln. Retrieved from http://www.dailykos.com/story/2010/12/7/926544/-Blanche-Lincolns-Revenge

Lincoln, M. (2010, July 14) Lincoln, Kyl Introduce Estate Tax Reform Proposal. Retrieved from http://lincoln.senate.gov/newsroom/2010-7-14-1.cfm

Marr, C., and Brunet, G. (2009, December 2) Congress Should Not Weaken the Estate Tax Beyond 2009 Parameters. Retrieved from http://www.cbpp.org/cms/index.cfm?fa=view&id=3017

Marr, C., and Brunet, G. (2009, November 9) Berkley Estate Tax Bill Would Add Billions to Deficit While Benefiting Only Wealthiest 1 in 500 Estates. Retrieved from http://www.cbpp.org/cms/index.cfm?fa=view&id=2972

Aron-Dine, A. and Friedman, J. (2006, June 2) The State of the Estate Tax as of 2006.  Retrieved from http://www.cbpp.org/cms/?fa=view&id=339

Wingfield, B. (2010, December 7) How The Tax Compromise Might Affect Estate Planning.  Retrieved from http://blogs.forbes.com/brianwingfield/2010/12/07/how-the-tax-compromise-might-affect-estate-planning/

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