Saturday, November 13, 2010

Your Tax Questions, Asked and Answered (by a U.S. Treasury Official)

Yesterday the Freakonomics blog, on, posted a blog entry with questions from readers and answers from Michael Mundaca, the Assistant Secretary of the Treasury for Tax Policy. Topics include common tax issues ranging from offshore tax shelters to the messy estate tax situation. You can find a few of the questions below, or go to for the full article.

    Q. Is this really a good year to die — tax wise? And do you expect an uptick in deaths as the calendar year ends? Have we ever seen a similar incentive to die, and did it spur deaths? – Drill-Baby-Drill Drill Team

    When will congress straighten out the estate tax mess so that people will know how to plan? – n bergman

    A. In general, I wouldn’t think any year is a good year to die, but you are correct that, under current law, the estates of those who die in 2010 are not subject to the estate tax. However, not being subject to the estate tax is not advantageous to all estates and heirs. Under 2009 law, $3.5 million of each estate was essentially exempt from the estate tax, but the heirs receiving property from such an estate nevertheless received assets with a “stepped up” tax basis, meaning that when such assets were sold, tax would be due only on any appreciation during the time the heir held the asset. For example, assume that someone died with an estate valued at $3 million dollars, all in stock, which passed to one non-spouse heir. Assume that the decedent had paid $1 million for the stock. If the decedent died in 2009, no estate tax would be due (because the estate is worth less than $3.5 million), and the heir’s basis in the stock would be increased to $3 million. Thus, if the heir immediately sold the stock, no capital gains tax would be due either, as there would be no gain. If instead that same person died in 2010, again no estate tax would be due, because it has been allowed to expire, but if the non-spouse heir immediately sold the stock received, capital gains tax would be due, because the value would exceed the basis. The Administration has proposed extending the estate tax (and the related gift and generation skipping taxes) at 2009 parameters (for the estate tax, an exemption amount of $3.5 million and a top rate of 45 percent). We are hopeful that Congress will address the estate tax before year end.

    Q. Has anyone figured out exactly how it is going to work for same-sex married couples in community property states like California? My accountant still has no clue… – Paul

    A. Regarding tax issues faced by same-sex married couples in community property states such as California, there are some helpful IRS resources, including a Chief Counsel Memorandum issued in May of this year that addresses some tax issues faced by California Registered Domestic partners (the memo is available here). Same-sex couples should consider consulting a tax professional about their particular situation.

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