July 10, 2009
/24-7PressRelease/ --
A Sensible Approach to the Federal Estate Tax
Article provided by Lawrence M. Simon Law Offices
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It has been a turbulent decade for the estate tax and Congress is poised to make some monumental decisions. In the simplest terms, estate taxes are collected from the very wealthiest estates when assets are transferred after death to beneficiaries and heirs. If an estate is of sufficient size to be taxed, a large portion is exempt from taxation and certain deductions (such as for charitable giving) are allowed to arrive at the taxable amount. The vast majority of Americans are never affected by the Federal estate tax; well under one percent of estates are large enough to be taxed, those worth millions of dollars.
The Federal Estate Tax
Earlier in our history, estate taxes funded the Spanish-American War and World War I. It has become a major source of federal government revenue, based on the idea that the wealthiest among us have an obligation to give back to the government, economic system and society that allowed them to flourish.
Critics of the estate tax have unsuccessfully tried to repeal it, calling it instead a death tax that taxes income twice, once when earned and again at death. In response, supporters explain that most of these large estates contain significant property holdings whose increases in value have never been taxed.
Proponents of an estate tax say that it encourages gifts to nonprofits; that people who become wealthy through the free enterprise system should give back to it; that the revenue it produces cuts deficits and government debt; and that without it drastic cuts in social spending would be necessary. At a basic level, the estate tax works to lessen the amount of wealth concentrated in the holdings of the most extremely wealthy and recycle that money into the economic system again to benefit all.
Impact of the Bush Tax Cuts
In 2001 the Bush-era tax cuts began to affect estate taxes. Largely a product of a difficult compromise between the pro and anti-estate tax camps, the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) triggered a 10-year estate tax phase-out plan. From 2001 to 2009, the portion of an estate exempt from tax was gradually increased and the tax rate was decreased. If the law is allowed to stand, in 2010 there will be no estate tax at all, just for one year. Congress will have to decide whether to make the repeal permanent. If not, in 2011 the tax would look similar to its 2001 structure with the first $1 million of an estate exempt and the tax rate at 55 percent.
Currently, the 2009 exemption stands at the first $3.5 million of an estate with the remainder taxed at 45 percent.
Washington is scrambling to prevent the lapse of the estate tax in 2010, which is hard to support in these difficult economic times. The Urban Institute-Brookings Institution Tax Policy Center estimates that in the first ten years without estate taxes, the cost to the nation would be about $1.3 trillion in evaporated tax revenue and increased interest on debt. Without the estate tax, the deficit and national debt would likely increase significantly. Lower and middle-income taxpayers would likely have to pay higher tax rates and the social safety net for the poor, elderly and disabled would likely be dangerously weakened.
On top of that, private charities could be seriously impacted and unable to compensate for government cuts to the needy. If deductions are no longer necessary to reduce the size of the taxable estate, the wealthy would not have the financial incentive to make charitable donations. The government estimates that the drop in donations would likely be in the billions of dollars.
President Obama's Position
The President supports making the 2009 estate tax levels permanent, applicable in 2010 and forward, with an ongoing automatic adjustment for inflation of the amount of an estate exempt from taxation. This approach is reflected in the president's budget proposal for 2010 and in a bill introduced in April by Senator Max Baucus, Democrat from Maine and Chair of the Senate Finance Committee, the
Tax Certainty and Relief Act of 2009 (S 722). This plan still sacrifices much revenue to the anti-tax movement by continuing a high estate exemption of $3.5 million and a relatively lower tax rate of 45 percent.
Representative McDermott's Proposal
Representative Jim McDermott, Democrat from Washington state's 7th Congressional District, a member of the House Ways and Means Committee and chair of the Subcommittee on Income Security and Family Support, recently put a more robust approach on the table. In April, he proposed the
Sensible Estate Tax Act of 2009 (HR 2023), a proposal that would raise more taxes than the Obama plan. Representative McDermott retains some element of compromise by proposing an exemption level of $2 million ($4 million for couples) rather than the $1 million the old law would reinstate in 2011, and by providing for lower tax rates for relatively smaller estates.
The tax rate would progress with the size of the estate:
-An estate worth more than $2 million and less than $5 million would be taxed at 45 percent (same as the 2009 rate).
-An estate worth more than $5 million and less than $10 million would be taxed at 50 percent.
-An estate worth more than $10 million would be taxed at 55 percent.
Representative McDermott's philosophy is that the very wealthiest of the wealthy -- still well under one percent of estates -- can part with relatively small fractions of their fortunes at death as repayment to the country and society that made the accumulation of such great wealth possible. The bill also encourages charitable contributions to nonprofit causes that provide vital services to needy Americans. He calls the estate tax "a return on the investment America makes in its people. No one is an island unto themselves." People able to accumulate extreme wealth reap the benefits of our "free enterprise system and the freedoms we all cherish."
The Time Is Now
People, government and the nonprofit sector need to plan now for next year, so time is of the essence for Congress. Time will tell which of several approaches will be taken in light of the soon-to-disappear-in-2010 estate tax. Representative McDermott's sensible bill represents a progressive approach that reasonably taxes only the very wealthiest to support the rest of us and our government.
Contact your senators and representative and let them know how you feel about the estate tax issue. Be sure you have a solid estate plan in place to protect your loved ones and support your favorite causes upon your death. If the estate tax could affect your financial interests, a knowledgeable estate planning attorney can advise you of your tax and estate planning options, and keep you apprised of the ever-changing landscape in Washington.
Article provided by Lawrence M. Simon Law Offices
Visit us at
www.bergenlaw.com---
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