Last week the U.S. Senate attempted to decide the fate of the estate tax. Unfortunately, members of Congress failed to pass any type of change to the laws surrounding this tax, which will likely create a mess over the next few years for anyone inheriting a large sum of money or property.
Expiration in 2010
In 2001, a conservative Congress passed legislation gradually decreasing the estate tax rates. Currently there is a 45% tax levied on estates worth more than $3.5 million, or $7 million for couples. However, this tax is set to expire completely beginning on January 1st, 2009. Since Congress did not pass any extension, beginning in the New Year no estates will be subject to the tax.
Passage in House / Holdup in Senate
A few weeks ago the House of Representatives passed a bill that aimed to extend the current 45% tax. The Senate then attempted to vote on a similar bill last Wednesday that aimed to extend the tax for two months – giving them enough time to hopefully develop a long-term solution – but between strong Republican opposition and a Congress focused on health care reform the effort was unsuccessful. Many experts call the issue a failure on behalf of the Obama administration and Democratic leaders for failing to address the problem before, and by neglecting to work with Republican leaders to develop an amicable solution.
More Aggressive in 2011
Although the estate tax will expire at the end of this year, starting on January 1, 2011 it will return even more aggressive than before. Unless legislation is passed before 2011, the estate tax would resume with a 55% rate on all estates valued at more than $1 million. If enacted, this rate increase would revert the estate tax back to levels seen in the early 1990’s.
Capital Gains vs. Estate
With the estate tax gone in 2010, another tax will likely begin affecting those who inherit $1.3 million or more in assets next year. Typically, these estates would be subject to little or not capital gain taxes, but without an estate tax the opposite would be true. For example, if you inherit a property valued at $1.5 million and decide to sell it then you would have to calculate capital gains based on the value of the home when it was originally purchased, not when you inherited it. Estimates from the House of Representatives assert that over 70,000 people will be affected by this change in capital gains over the next year.
Likelihood of Another Vote
Unfortunately, it is probably too late in the year for the Senate to take any further action on the estate tax. However, Democratic leaders have made the issue a “top priority,” and promise to work on a solution in the beginning of 2010. There is even talk that they may attempt to make the tax retroactive, meaning anyone who inherits a large sum of property or assets could be vulnerable to the estate tax.
Confusing Tax Code
By not coming up with a permanent solution to the estate tax Congress is going to make taxes very difficult for thousands of Americans. The tax code is already horribly complicated and all of these changes to the estate tax will only confuse more taxpayers. Additionally, many taxpayers who inherit a sizeable estate may end up paying more in capital gains than they would have with a 45% estate tax.