Quick pop quiz: what form of tax do most Americans claim to hate the most? Income taxes? Nope. Payroll taxes? Nope. Tax on alcohol? Tax on cigarettes? Nope and nope.

It’s the federal estate tax. That’s a pretty remarkable statement considering that fewer than 2% of Americans are generally subject to the federal estate tax (that number has decreased as the exemption has increased). And yet, it’s still the most hated tax in America. It’s no surprise then that the federal estate tax has again popped up as an election issue.

For those of you who aren’t familiar with what’s been happening, let me get you up to speed. The federal estate tax applies for estates which exceed a certain taxable amount. When I started practicing, that amount was $600,000 and basically what it meant was that you could pass $600,000 worth of net estate assets to someone other than a US citizen spouse without paying any federal estate tax (transfers to US spouses are eligible for a marital deduction so there’s no federal estate tax payable on those). Deductions also apply for administrative expenses (fees associated with the estate), debts of the decedent, some taxes and charitable gifts.

Congress bumped up the exemption amount over the next few years until it reached $1,000,000 in 2002. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001), signed into law by President Bush, the exemption climbed to $3,500,000 in 2009. The federal estate tax was “repealed” for the current year, 2010. However, the provisions of EGTRRA 2001 mean that the law actually “disappears” for 2011 and the old law kicks back in. Under the Taxpayer Relief Act of 1997, signed into law by President Clinton, the exemption would have been $1,000,000 in 2001 (it was actually $675,000 in 2001 because of EGTRRA). I know, it’s confusing.

The bottom line is that the federal estate tax exemption, unless Congress makes other plans, will be $1,000,000 in 2011. Depending on where you sit, this is either too much or not enough.

For years, it’s looked like the fight over the federal estate tax was going to focus on the amount of the exemption. As recently as July 2010, Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) introduced a compromise bill to increase the exemption to $5,000,000; that bipartisan bill looked to have a decent amount of support.

However, as the campaigns ramp up their volume, support for a compromise bill seems to be dwindling in favor complete repeal. More than half of the Republicans running for House and Senate have signed a pledge to eliminate the federal estate tax; only two Democrats and a few Libertarians have signed the pledge. You can see all the details on this map, prepared by the American Family Business Institute (AFBI). AFBI is a 501(c)(6) trade association founded in 1994 which states on its website that:

Our mission is the permanent repeal of the death tax, the federal estate tax. We focus 100% of our energy, leadership and resources on moving America towards this goal.

Realistically, I don’t think that anyone expects the federal estate tax to actually be repealed prior to 2011: eliminating the federal estate tax would cost $410 billion in the next decade alone. That’s a lot of revenue to give up in a tight economy. However, it’s clear that a change in leadership in Congress will be pushing for repeal, not for an increased exemption. The WSJ quotes Sen. Jim DeMint (R-SC) as saying that he hoped the 2010 elections would generate “the momentum to finally kill the death tax for good.” But will it? I don’t think so. It is interesting, however, to see the issue back on the table.

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Author

Kelly Erb is a tax attorney, tax writer and podcaster.

Comments

  1. The estate tax may be my single favorite tax. We’ve already got too much of the wealth in too few hands, without having a permanent hereditary rich aristocracy.

  2. Since — I am sorry to report — my Dad died last month, I no longer get as wound up about this issue as I used to. But the fundamental reason why everyone hates the estate tax is that it constitutes double taxation. The money my Dad earned during his scientific career? It was taxed on the way in. (He didn’t leave any tax-deferred accounts behind.) No matter how much we might hate the rich aristocracy, what’s fair is fair — and double taxation, almost everyone agrees, is fundamentally unfair.

  3. Urbie, it’s not really double taxation. The money your father earned on the way in was taxed for income. The tax that he may or may not have faced for an estate tax was just that– on his estate. I mean, when he spent his money buying things and sales tax was added on, despite the fact that the money he was spending had already been subject to an income tax, do you consider that double taxation?

  4. Since you ask, yes, the estate tax is double taxation — as are the sales tax, the property tax, the dividend tax, and every other tax after the income tax. (Property taxes are particularly unfair because they’re levied every year — my wife and I have owned a piece of land for about 10 years, and we’ve paid taxes on it every year. This is despite using zero services — it’s just a piece of land, sitting there doing nothing. But I digress.)

    I understand the concept that the same dollars can be taxed both as income and as an estate. In my book, that’s being taxed twice — hence the term “double taxation.” Unfair. Fortunately, there’s no Federal estate tax this year (there is a Massachusetts state tax, but my Dad’s estate probably won’t owe much, if anything). So for once, we catch a break. Alert the media!

    Urb

  5. So, it is OK to tax money you earn, but not money gifted to you at death? I don’t see it as double taxation. Dad paid taxes on *his* money. Now, it is *your* money. You don’t inherit the fact that he paid taxes. On the plus side for many, many, more Americans, you don’t inherit debt either (there are places in this world where you do). If you buy a used car, you pay sales tax on it. You don’t carry the original sales tax with it. For what it is worth, I do believe that estate tax should start at some amount, lets say 1M, and then let that grow with inflation. Also, isn’t it possible avoid estate taxes altogether if you leave 1M to your heirs and the rest to charity (assuming 1M max)? You can even gift your heirs thousands of dollars of each year while you are alive without them having to pay tax either.

  6. So Urbie, are you against what you call “double taxation” in all cases, or are you merely observing that it exists? I’m just curious as to how you think people should be taxed; on income tax alone? That would certainly place a large burden on the fortunate citizens who are currently employed.

  7. As a legal secretary who typed more than my fair share of federal estate tax returns (first one 1974, exemption $60,000, four carbons!), I cannot ever remember any family member of a decedent being upset or balking at having to pay the tax. Not that that’s a measure of whether we should have the tax or not, just noting the lack of care or protest. They were just so happy to finally get their hands on that money.

  8. Property tax is probably the fairest tax as it represents real wealth. Even if your land is just sitting there it’s “using” such government services as national defense.

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