It’s Fix The Tax Code Friday!
Tax reform continues to make the news. This week, at the Conservative Political Action Conference (CPAC), President Trump reiterated his promise to “massively lower taxes on the middle class.” How that’s going to happen is still up for debate. What may be more likely, however, is the elimination of a tax, as described recently a Tax Analysts post on Forbes, that “almost no one pays.” That tax is the federal estate tax.
The federal estate tax is a tax on estate assets over the exemption amount. For 2017, that exemption amount is $5.49 million per individual or, with portability, $10.98 million per married couple. Even then, there are estate tax planning techniques that can easily shift millions more dollars to future generations either tax-free or tax-deferred (trust me on this: I cut my teeth as an estates attorney). Those kinds of numbers mean that the tax tends to be paid by the ultra-rich.
In 2015, there were 2,626,418 deaths in the United States. According to the Internal Revenue Service (IRS), 11,917 federal estate tax returns were filed in 2015 (at that time, the estate tax exemption was $5.43 million). That works out to .45% of all decedents or less than 1/2 of 1%. Of those, 4,918 federal estate tax returns were taxable (6,999 were nontaxable returns). That brings the percentage of taxable estates for 2015 to .18% or less than 1/4 of 1%.
(In case you’re curious, the states reporting the most estate tax returns were – in order – California, Florida, New York, Texas, and Illinois.)
Despite the relatively low numbers of taxpayers affected by the federal estate tax, it remains highly unpopular. Efforts to repeal the tax have been introduced every year, but the quandary has been: how do you replace the revenue? One suggestion making the rounds (again) is to repeal the estate tax and replace the “step-up” in basis with capital gains tax. Why? Assets that pass at death get a “step-up” in basis to the date of death value which means that the appreciation to the date of death is not taxed.
Here’s a quick example:
- Let’s say you bought $1,000,000 worth of Apple stock which, at your death, is worth $5,000,000.
- If you had sold that stock just before death, you would have paid capital gains tax on the $4,000,000 worth of appreciation ($5,000,000 – $1,000,000 = $4,000,000).
- If you die holding the stock, you would not have paid capital gains tax on the appreciation and your beneficiaries get to carry the asset with a new stepped-up basis of $5,000,000.
That’s what the current scheme looks like.
If you eliminate the federal estate tax and retain the full “step-up” in basis for all assets, those assets would get a double pass – no federal estate tax and no capital gains tax. While that sounds appealing, from a revenue collection standpoint, it’s not a winner. That’s why most serious plans to eliminate the federal estate tax (a la the 2011 “repeal”) include some kind of adjustment to the current capital gains tax scheme.
It’s a tricky concept. Eliminate the estate tax full stop? Eliminate and replace with a capital gains tax scheme? Or leave it alone?
That, of course, brings us to today’s Fix The Tax Code Friday question:
Should we eliminate the federal estate tax?
