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Federal Estate Tax Gets Some Interest

July 15, 2010 · 10 comments

On July 14, US Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) released a press release with a proposal to “permanently reform the federal estate tax.”

Under the current scheme, there is no federal estate tax for 2010 but decedents’ estates for this year are subject to a set of complicated capital gains rules. Beginning in 2011, the personal exemption will revert to $1 million and assets over that amount will be taxed at a flat 55% rate.

Under the bipartisan proposal, the exemption would be increased to $5 million phased in over 10 years and indexed for inflation. The taxable rate would be a flat 35%. Basis for assets would be “stepped up” at death, just as it was before 2010.

The proposal also includes an alternative election for 2010 that would allow deceased taxpayers to either retain this year’s estate tax rate (0%) together with “carry over basis” (as opposed to “stepped up basis”) or file under the provisions of the new bill using the new rate (35%) together with “stepped up basis.”

The proposal has received lukewarm reviews so far (though, admittedly, it’s just been a day since the official proposal has been released). A key endorsement did come from the AFBF (American Farm Bureau Federation) which has voiced its support of the Lincoln-Kyl plan. AFBF President Bob Stallman wrote a letter to Senate Majority Leader Harry Reid (D-NV) urging him to consider the proposal.

One of the initial problems with the Lincoln-Kyl proposal has not gone unnoticed: the proposal would generate less revenue than Obama’s proposal. Under the proposal, the Senate Finance Committee must offset the difference in revenue though the details of how that’s going to happen are unclear.

But hey, maybe some progress? I mean, it’s better than the “let’s do nothing and keep them guessing” plan that we’ve gotten used to…

{ 5 comments… read them below or add one }

1 Carol Fritz July 15, 2010 at 1:09 pm

No, some of us have still not thrown in the towel. Those capital gains calculations without the stepped-up basis are going to be a nightmare for many uninformed people who inherit even small estates this year.

2 Icarus July 15, 2010 at 3:20 pm

What does “Basis for assets would be “stepped up” at death, just as it was before 2010.” mean? How would someone who inherits say a parent’s house be affected

3 Mary Kay Foss July 18, 2010 at 2:41 am

“Stepped up” basis means that assets are revalued as of the date of death of the property owner. Prior to 2010 when someone passed away – the market value of all of the assets including their residence were valued; in most cases the value at the date of death became the cost for whomever inherited the property. If someone’s parent passed away in 2009 or earlier and left their house to a child, the child’s cost would become the value at the date of death for gain or loss purposes.
In recent times some assets were “stepped down” in value if they were purchased shortly before real estate and security values tumbled.
The rules for 2010 are complex in determining the basis of inherited assets.

4 Icarus July 18, 2010 at 11:13 am

Can you give a simpleton like me examples of how this would be beneficial or detrimental to someone. I’m guessing it’s something along the line of my folks paid $50K for their home in adjusted dollars in the 40s and now i’m being taxed for getting a $200K place that is really only worth $140K in todays’ market, but some elaboration would be appreciated.

5 Kelly July 18, 2010 at 11:23 am

Hi Icarus – I’m going to devote a whole post to it today or tomorrow. Keep watching. ;)

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