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.
I’ve always been opposed to repeal of the estate tax as an egregious sop to the ultra-rich. I’d approve a $5/$10 million exemption as proposed; I’m not sure about the lower tax rates, though.
It used to be the estate/gift tax; gifts were taxed the same as estates (the taxes applied to the aggregate of gifts, not to each gift separately). Now the estate tax exemptions are much larger than the $1/$2 million for gifts. Why not tax gifts the same as estates?