By Kim Dixon
WASHINGTON (Reuters) - The scheduled expiration of the tax on wealthy estates in the United States, unthinkable just days ago, has whipped the wealthy and their estate planners into a flurry of confusion over the changes to the controversial tax.
Under a quirk in the law, beginning on January 1 there will be a one-year repeal of a 45 percent tax on the value of estates over $3.5 million for individuals and $7 million for families.
"I'm going to be fending calls from people saying, 'Should I keep mom plugged in?'" said Carol Harrington, head of the private client group at law firm McDermott Will & Emery. "This is a disaster even if you are in favor of repeal."
Now, those who die on December 31 will pay the tax, while those who die a day later will not. In addition, the law's expiration unleashes a slew of changes, including for capital gains treatment of estates.
And because of the same quirky 2001 law that repeals the tax for a year, the estate tax is due to spring back to life in 2011 at a higher rate of 55 percent rate, which would be levied on estates with a value over $1 million for individuals.
The conventional wisdom had been that the Democrat-controlled Congress would pass an extension of current law. But opposition from Republicans to the tax and a U.S. Senate mired in a partisan health-care debate has prevented that from happening.
Once the current estate tax expires on December 31, those inheriting states will have to pay capital gains taxes on any assets sold based on the original price paid for the asset, after an exemption for the first $1.3 million in capital gains.
That is changed from the current law, which uses the market value of an asset at the time the estate is inherited as the basis for calculating capital gains on any future sale.
This will mean higher taxes for as many as 70,000 taxpayers, according to House Democrats, many more than will be impacted by elimination of the estate tax itself.
Tax experts say that the change will create a major problem because of the paperwork needed to establish the original investment price. Without documentation, the original basis goes to zero, meaning that the full sale price would be taxable after $1.3 million.
"Many people don't keep records," said Brenda Schafer, manager of tax analysis at the Tax Institute at H&R Block. "It's not like we can go back in time and get those records."
The estates of about a quarter of 1 percent of Americans would be subject to the estate tax under an earlier bill introduced by Democrats to extend it permanently, according to the Brookings Institution-Urban Institute Tax Policy Center.
CONSTITUTIONALITY OF A FIX
An aide to Senate Finance Committee Chairman Max Baucus said Baucus still holds out hope for an 11th-hour extension of the current tax, though most analysts are dubious.
"I am stunned that the Democrats, who have professed undying support for estate taxation all these years, have been in power for now this time, and not enacted" an extension," said Bill Ahern, policy and communications director at the conservative Tax Policy Foundation, which backs a repeal of the estate tax.
The tax has divided some Democrats, with conservatives from the party teaming with Republicans to propose a lower tax with a greater exemption level.
The battle will likely begin anew next year. Baucus said he will aim to retroactively reenact the tax at current levels, a policy backed by most Democrats.
But Clint Stretch, a former legislative counsel to the joint congressional committee on taxation, said there is a debate about the constitutionality of such a fix.
"Since scholars are divided in their opinions on whether the Constitution allows Congress to retroactively reimpose those taxes, litigation will result," he predicted.
And the politics are complicated by the reinstatement of the tax at a higher rate in 2011.
Progressive groups such as the Citizens for Tax Justice see this as the silver lining of a one-year repeal.
The specter of higher rates has led traditional opponents of the tax, such as the Chamber of Commerce and small business groups, to back a permanent extension of current policy.
Friday, December 18, 2009
Wednesday, December 16, 2009
Baucus to Try Next Year to Extend Estate Tax Retroactively
Washington Post
December 16, 2009
WASHINGTON -- Senate Finance Committee Chairman Max Baucus (D., Mont.) said he will try early next year to pass legislation ensuring no lapse in the estate tax, after Republicans blocked another effort to extend the tax for a three-month period.
Democrats had sought to extend the tax at its current, 2009 levels, but it now appears likely the tax will be repealed as scheduled Jan. 1. Mr. Baucus said he will try to move legislation early in 2010 that ensures that there won't be a window where wealthy estate owners who die will escape the tax.
"We clearly will work to do this retroactively, so that when the law is changed, it will have retroactive application," Mr. Baucus said on the Senate floor Wednesday.
Mr. Baucus sought unanimous consent from the Senate for a two-month extension of the tax, warning that allowing the tax to be repealed pending congressional action would create unnecessary confusion.
But Republicans said the repeal should be allowed to take effect, as provided under current law. "The problem doesn't have to exist if they'll just leave the existing law alone, and let the rate go to zero, where everyone wants it anyway," said Sen. Jon Kyl (R., Ariz.).
In 2009, estate wealth above $3.5 million, or $7 million for married couples, is taxed at a 45% rate. The estate tax will disappear in 2010, replaced by a capital-gains tax paid when heirs sell inherited assets. Then in 2011, unless Congress acts, the estate tax will return to tax estates above $1 million, or $2 million for couples, at a 55% rate.
Mr. Baucus called that a "yo-yo effect."
"It's so irresponsible to further the yo-yo effect by allowing current law to expire, and create this massive confusion," he said.
December 16, 2009
WASHINGTON -- Senate Finance Committee Chairman Max Baucus (D., Mont.) said he will try early next year to pass legislation ensuring no lapse in the estate tax, after Republicans blocked another effort to extend the tax for a three-month period.
Democrats had sought to extend the tax at its current, 2009 levels, but it now appears likely the tax will be repealed as scheduled Jan. 1. Mr. Baucus said he will try to move legislation early in 2010 that ensures that there won't be a window where wealthy estate owners who die will escape the tax.
"We clearly will work to do this retroactively, so that when the law is changed, it will have retroactive application," Mr. Baucus said on the Senate floor Wednesday.
Mr. Baucus sought unanimous consent from the Senate for a two-month extension of the tax, warning that allowing the tax to be repealed pending congressional action would create unnecessary confusion.
But Republicans said the repeal should be allowed to take effect, as provided under current law. "The problem doesn't have to exist if they'll just leave the existing law alone, and let the rate go to zero, where everyone wants it anyway," said Sen. Jon Kyl (R., Ariz.).
In 2009, estate wealth above $3.5 million, or $7 million for married couples, is taxed at a 45% rate. The estate tax will disappear in 2010, replaced by a capital-gains tax paid when heirs sell inherited assets. Then in 2011, unless Congress acts, the estate tax will return to tax estates above $1 million, or $2 million for couples, at a 55% rate.
Mr. Baucus called that a "yo-yo effect."
"It's so irresponsible to further the yo-yo effect by allowing current law to expire, and create this massive confusion," he said.
Monday, December 7, 2009
House votes to make estate tax permanent
By Kim Dixon
December 3, 2009
WASHINGTON (Reuters) - The U.S. House of Representatives passed a permanent extension of the federal estate tax on Thursday, but the measure, which taxes estates at rate of 45 percent after exempting the first $3.5 million, is likely to be changed in the Senate.
The current tax is due to expire on December 31 but return in 2011, when it will exempt just the first $1 million of an estate while taxing the remainder at a rate of 55 percent.
Keeping the current rate would cost the government $234 billion of revenue over 10 years, according to a congressional tax committee.
The bill passed 225 to 200, drawing all its support from Democrats.
"The estate tax is critical to prevent a permanent aristocracy from arising in this country," said Jared Polis, a Colorado Democrat who said, as one of the wealthiest members of the House, he would pay the tax under the bill.
Republicans blasted the bill and called for complete repeal of the tax. "Death in and of itself should not be a taxable event," said Dave Camp, a Michigan Republican.
Preserving the 45 percent rate and the $3.5 million exemption indefinitely will be much harder in the U.S. Senate because of the cost. In addition, Senate lawmakers are consumed by the healthcare reform bill debate, which could continue into January.
Given the price tag, the bill is "pretty much a non-starter" in the Senate, analyst Anne Mathias at Concept Capital said.
A likely compromise in the Senate is a one-year extension of current law, which would raise some money because of the 2010 phase out.
The estates of about a quarter of one percent of Americans would be subject to the tax under the House bill, according to the Brookings Institution-Urban Institute Tax Policy Center.
The non-partisan Congressional Budget Office reported in 2005 that fewer than 2 percent of all estates have had to pay estate taxes in recent years.
Republicans warned Democrats would suffer at the ballot box if they extend the tax, citing Americans' general dislike of any new taxes.
Democrats countered by citing prominent estate tax proponents, including investors George Soros and Warren Buffett, who has argued the tax helps keep America a meritocracy.
BUSINESS GROUPS SPLIT
Business groups are divided on the legislation.
The Chamber of Commerce has long called for the abolition of the estate tax, although recently said it was willing to back a continuation of the current law.
"The uncertain nature of the estate tax regime over the next two years is a major concern for business, many of which are struggling in this current economic downturn," Bruce Josten, a lobbyist for the Chamber, said in a letter to lawmakers on Wednesday backing the Democrat's bill.
The National Association of Manufacturers urged rejection of the bill, saying its members pay tens of thousands of dollars in fees for estate planning.
CAPITAL GAINS RELIEF
The House bill contains capital gains tax relief for those inheriting estates by repealing so-called carry-over basis rules.
With no action, those inheriting estates after December 31 will have to calculate capital gains taxes based on the original price paid for the property.
"People will be stuck with large tax bills forcing liquidation if they were forced to pay a capital gains tax on a 1959 basis," said Polis, the Colorado lawmaker. "Do opponents truly believe making families pay capital gains is better?"
The American Farm Bureau, the nation's largest agricultural group representing all sizes of farms, opposes any estate tax but backs the portion of the bill that repeals the cost basis rules. The group had no data on how many of its members would be impacted by the tax.
(Editing by Steve Orlofsky and Tim Dobbyn)
December 3, 2009
WASHINGTON (Reuters) - The U.S. House of Representatives passed a permanent extension of the federal estate tax on Thursday, but the measure, which taxes estates at rate of 45 percent after exempting the first $3.5 million, is likely to be changed in the Senate.
The current tax is due to expire on December 31 but return in 2011, when it will exempt just the first $1 million of an estate while taxing the remainder at a rate of 55 percent.
Keeping the current rate would cost the government $234 billion of revenue over 10 years, according to a congressional tax committee.
The bill passed 225 to 200, drawing all its support from Democrats.
"The estate tax is critical to prevent a permanent aristocracy from arising in this country," said Jared Polis, a Colorado Democrat who said, as one of the wealthiest members of the House, he would pay the tax under the bill.
Republicans blasted the bill and called for complete repeal of the tax. "Death in and of itself should not be a taxable event," said Dave Camp, a Michigan Republican.
Preserving the 45 percent rate and the $3.5 million exemption indefinitely will be much harder in the U.S. Senate because of the cost. In addition, Senate lawmakers are consumed by the healthcare reform bill debate, which could continue into January.
Given the price tag, the bill is "pretty much a non-starter" in the Senate, analyst Anne Mathias at Concept Capital said.
A likely compromise in the Senate is a one-year extension of current law, which would raise some money because of the 2010 phase out.
The estates of about a quarter of one percent of Americans would be subject to the tax under the House bill, according to the Brookings Institution-Urban Institute Tax Policy Center.
The non-partisan Congressional Budget Office reported in 2005 that fewer than 2 percent of all estates have had to pay estate taxes in recent years.
Republicans warned Democrats would suffer at the ballot box if they extend the tax, citing Americans' general dislike of any new taxes.
Democrats countered by citing prominent estate tax proponents, including investors George Soros and Warren Buffett, who has argued the tax helps keep America a meritocracy.
BUSINESS GROUPS SPLIT
Business groups are divided on the legislation.
The Chamber of Commerce has long called for the abolition of the estate tax, although recently said it was willing to back a continuation of the current law.
"The uncertain nature of the estate tax regime over the next two years is a major concern for business, many of which are struggling in this current economic downturn," Bruce Josten, a lobbyist for the Chamber, said in a letter to lawmakers on Wednesday backing the Democrat's bill.
The National Association of Manufacturers urged rejection of the bill, saying its members pay tens of thousands of dollars in fees for estate planning.
CAPITAL GAINS RELIEF
The House bill contains capital gains tax relief for those inheriting estates by repealing so-called carry-over basis rules.
With no action, those inheriting estates after December 31 will have to calculate capital gains taxes based on the original price paid for the property.
"People will be stuck with large tax bills forcing liquidation if they were forced to pay a capital gains tax on a 1959 basis," said Polis, the Colorado lawmaker. "Do opponents truly believe making families pay capital gains is better?"
The American Farm Bureau, the nation's largest agricultural group representing all sizes of farms, opposes any estate tax but backs the portion of the bill that repeals the cost basis rules. The group had no data on how many of its members would be impacted by the tax.
(Editing by Steve Orlofsky and Tim Dobbyn)
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