No Estate Tax in 2010 for Now-But Don’t Write it Off as Dead Yet

by RC on January 11, 2010

The death of the estate tax in 2010 has some wealthy people jumping for joy, some confused, and many people wondering what is going to happen to the estate tax exemption and rate in 2010 and going forward.

The estate tax problems started in 2001, when Congress passed legislation which incrementally reduced the estate tax rate while increasing the amount of the exemption through 2009, but had it expiring completely beginning in 2010. The amount of the exemption for 2009 was $3.5 million per individual, with a tax rate at 45%.

Based on the law passed in 2001, the estate tax will reappear in 2011 with a low(er) $1 million exemption and a whopping 55% tax rate.

So what will Congress do in regards to the estate tax?

  • If Congress does nothing, which most experts think is unlikely, the estate tax will reappear in 2011 with very unfavorable term, likely angering everyone but those who happen to receive an inheritance in 2010.
  • More than likely, Congress will pass new legislation sometime in 2010, and may apply it retroactively to Jan. 1, 2010. Some Congressmen have already publicly sated that this is what they intend to do, but you know how politics go.
  • Most pundits also believe that Congress will also make changes to the severe estate tax limitations set to be imposed in 2011, and many people are hoping they are, I would imagine, as it will effect a whole lot more families in the estate tax amount drops to $1 million with a 55% tax rate.

Another problem with the current situation is that in 2010, there is a $1.3 million dollars limit on the step up in cost basis, which would typically allow heirs to use the date of death of the person leaving them money as the basis for establishing their value of the assets when it was later sold. When the asset are later sold, the value at the date of death is used to determine the value for capital gains purposes. In past years, the amount that could be stepped up in cost basis was unlimited, subject of course to the estate tax. This year, however it is limited, so that any amount above the $1.3 million uses the cost-basis of the deceased, which could add quite a bit to an heir’s tax bill if the amount inherited were to exceed that amount. This could cause a paperwork nightmare, especially if the assets were purchased many years ago and good records were not kept.

Although most people think that these issues are only for the ultra-wealthy, it can effect many families that have and run small businesses, for example, and have a significant amount of that money tied up in the business.

It is quite interesting that Congress could not find the time to extend the tax from 2009, or even begin to work on fixing the mess that the estate tax is now. They all knew it was coming up, and had plenty of time to make adjustments to prevent the current estate tax quagmire, but did not do so.

Do you think the estate tax is even fair? Many don’t think so, as it seems as if it is a “double tax” in some ways, since the income used to invest and build assets was already taxed once.

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{ 2 comments… read them below or add one }

Financial Samurai January 11, 2010 at 11:18 am

I’m pretty sure Congress will permanently pass the law of $3.5 mil cap for single income earners. They know in their hearts the death tax is evil.

This is a great reminder for us all to also spend money throughout our lives. Can’t take the money with you!

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RC January 11, 2010 at 7:31 pm

@FS- You are probably right- although Congress has never been known for doing the right thing- only they thing that will get them re-elected or benefits them the most.

It certainly does remind us that money doesn’t do you any good when you’re gone, especially when your heirs have to share it with the tax man!

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