Remember years ago when there was a lot of buzz about the federal estate tax “repeal” set to take place in 2010? It’s still law. But the thing that Congress didn’t make quite so public is that the repeal only lasts for one year. One. After 2010, the federal estate tax rolls back in at its pre-legislative limits. The exemption drops back to $1 million per individual and the old rates apply.
Most tax pros expected to see Congress address this issue much earlier. After all, Congress had nearly 10 years to do something about it. Only they didn’t. Rather than work on a compromise bill, Congress did a few years of the back and forth “all or nothing” nonsense that generally results in, well, nothing. When Sen Bill Frist (R-TN) became Majority Leader of the Senate in 2003, he pledged to make repealing the federal estate tax a top priority… and then a little something happened on March 20, 2003. The US went to war in Iraq.
The war in Iraq cost a lot of money. A lot. Estimates are that the war cost the US almost $3 trillion. Suddenly, with increased expenditures, support for tax cuts for the wealthiest 2% of Americans wasn’t quite as popular as it had been. Frist never pursued the repeal and other proposals to eliminate or drastically repeal the bill fizzled.
Five years later, the economy is even more damaged than before. Unemployment is creeping closer to 10%, the Dow has declined significantly since its heyday, foreclosures are up and home sales are down. It is, then, perhaps not the best time from a political to talk estate tax reductions. But now, Congress has little choice.
President Obama is well aware of the political dangers inherent in this one. Interestingly, while very few Americans are actually affected by the federal estate tax (currently, the tax does not apply to decedents with less than a $3.5 million taxable estate or $7 million for a married couple), it’s a hot button issue. Many Americans relate to the idea of a “death tax” whether they’d be affected or not.
With that in mind, President Obama has proposed freezing the federal estate tax at the 2009 level (again, exempt for individuals with less than a $3.5 million taxable estate or $7 million for a married couple). At that level, it’s estimated that only about three-tenths of one percent of estates will be taxable.
Some Senators are clamoring for repeal. But most have decided that it’s not a battle worth fighting; with less than 1% of taxpayers affected, there are more popular tax concerns that the estate tax repeal. Instead, there are indications that the GOP will present a counter proposal of a $5 million exemption ($10 million for a married couple) with lower marginal tax rates.
It will be interesting to see what happens going forward. If the economy turns around more quickly, it will certainly change the equation but not to the point of repeal. Most of us who have watched the repeal argument ebb and flow since the Clinton days (when the exemption was a mere $600,000) don’t expect a repeal under this administration – quite frankly, I didn’t expect one under the last either. The tax may change over the next few years but it’s not going anywhere.
Taxpayer asks:
I’ve been trying to get my parents to make a Will. I’m now there only living child. My parents have told me everything goes to me. They have been told by a friend that if they make a Will & leave me everything including there house that when they die I will have to pay taxes from the date they signed there Will. Is that correct?
Taxgirl says:
Nope, not even close.
An estate is taxed as of the date of death, not as of the date of signing a Will.
The lack of a Will does not result in a lesser tax burden. Similarly, any scheme to avoid probate (such as simply funding a revocable trust) does not relieve the estate of a tax burden. In fact, without any planning, your parents’ estate will likely be subject to estate and/or inheritance taxes depending on your state of residence and the size of their assets. A good estate planning attorney will be able to create a strategy to help save on taxes and not the other way around.
And last word? Irrespective of taxes, absolutely everyone should have a Will. It doesn’t matter how much or how little you own. Really.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
As blogged previously, Obama’s proposed stimulus package is meeting resistance – on both sides of the aisle.
Key members of the Senate Finance Committee have criticized plans for a $3,000 tax credit for new hires, citing that it wasn’t the most effective means of promoting employment. Sen. John Kerry (D-MA) said, “I’d rather spend the money on the infrastructure, on direct investment, on energy conversion and other kinds of things much more directly and much more rapidly and much more certainly create a real job.”
Also on the hit list? Proposed tax credits for working Americans, which had been pitched as a reduction in federal withholding. The credit would work out to $19.23 per week for married couples and a mere $9.62 per week for individuals. Some Senators (and readers on my blog) have suggested that would not do much for the economy, considering the cost.
Some members of the House are also calling for changes to the much dreaded AMT (alternative minimum tax), a continual thorn in Congress’ side. Of course, if history is any indication, if they start whining about the AMT now, they might – might – reach an accord by December…
Surprisingly, there has been little reaction to Obama’s plan (or lack of a plan) to not touch the federal estate tax. I’m guessing that proponents of eliminating the tax realize that it might not be politically advantageous to raise the idea of cutting the federal estate tax (with exemptions sitting at $7 million per family in 2009) during the current economic climate. But I’d expect to see the idea raised sometime during the year – the flukey one year “repeal” of the federal estate tax is set for 2010, with sunset provisions ready to drop the exemption to $2 million per family in 2011 with no action from Congress.
Of course, all of this is still just conversation until the ink is dry. What are your thoughts on what will stay and what will go? Got any better ideas?
Taxpayer asks:
My father wants to sell me his house (approx. value of $300,000) for what he owes on it ($54,000). I know, a pretty sweet deal. Some friends advised him that the best way to do this is simply to “give” me the house, and I will send him a Christmas card with $54,000 in it. What is the best way to complete this transaction when it comes to taxes. The house is located in Florida.
Taxgirl says:
This question has lots of layers… So, I’ll start off my re-emphasizing that you should consult with your tax professional – there is a lot of information outside of this transaction (such as your father’s estate planning situation) that will affect the outcome.
But here is the basic result: Your father is making a gift to you in the amount of $246,000. A below market sale is generally considered a gift to the extent of the difference between fair market value and the “selling price” – in your case, $300,000 (FMV) – $54,000 (purchase price) = $246,000 (gift). Since your father is entitled to give you $12,000 per year without any consequences, the taxable value of the gift for federal gift tax purposes is $12,000 less, or $234,000.
With that, I differ with your friends as to the best way to complete the transaction. If your father and you are both in agreement that this is a sale for $54,000, then treat it like a sale – none of this cash in the envelope nonsense. If you attempt to hide the sale price, it may be difficult for you to later prove that the entire $300,000 was not a gift. The amount of the gift is important for estate and gift tax purposes. Additionally, if you treat the whole thing as a gift and you “gift back” $54,000, you’re just complicating the situation. You can read more about what gift tax is at my prior post.
As far as income tax goes, assuming that there’s nothing strange about the mortgage, etc., the sale should not result in federal income tax consequences. There should be no capital loss or gain.
And here’s where I’m a lawyer and tell you some “buts”…
Your father’s estate could be affected by the gift, depending on his health and financial situation. Even if he’s not subject to federal estate tax, making gifts may affect Florida Inheritance Tax, so be sure and check that out.
Any claims for Medicaid or other government assistance made by your father could also be affected by such a gift.
There are also basis issues for you to consider. The FMV of the property, the donor’s basis and the value of the gift will all affect your basis for purposes of future sale. You’ll want to run that information by your tax professional.
See what you get for asking a lawyer?
Seriously, while the transaction feels simple, it may not be, taking into consideration the bigger picture. Since the amount of the gift is significant, I’d check your tax professional before moving forward, just to make sure there are no surprises. There may even be a better way to structure the transaction, depending on your circumstances.
Good luck – and enjoy your “new” home!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl!
