The Incredible Shrinking Estate Tax

As yet another sign of the country’s economic woes, this year there were just 5,500 Americans who left behind taxable estates. This equates to less than one-quarter of one percent of all U.S. deaths, which is the smallest percentage since the great depression. Why is the percent of taxable estates so low? Well TaxVox has put together an interesting article explaining the trend, as well as the as graph comparing deaths subject to tax and exemption levels, both of which are listed below.

In part, that tiny fraction reflects the current recession’s devastation of assets—the Fed estimates that the total value of household and nonprofit assets fell by about one-sixth between 2007 and the first quarter of 2009. But changes in estate tax rules over the past decade have played a much larger role than economic swings.

The Economic Growth Tax Relief and Reconciliation Act of 2001 (EGTRRA), best known as the Bush tax cuts, phases the estate tax out over a decade. The act raised the effective exemption incrementally from $675,000 in 2001 to $3.5 million in 2009 and dropped the top tax rate from 55 percent to 45 percent. The levy disappears entirely in 2010, only to return in 2011 under pre-EGTRRA law—a $1-million exemption and 55-percent top rate. The Obama administration has proposed making the 2009 parameters permanent and indexing them for inflation. Others would set a higher exemption and a lower tax rate.

So what’s happened?

For decades before 1976, only estates worth $60,000 or more owed estate tax. That threshold remained constant in nominal terms, so more and more estates had to pay the tax as economic growth and inflation boosted household wealth. In 1943, just under 1 percent of deaths led to estate tax payments; by 1976, that share had grown to 7.65 percent (see graph).

Congress doubled the effective exemption to $120,000 in 1977 and raised it gradually to $600,000 in 1987, where it stayed for ten years. As the exemption rose, the share of estates owing tax fell to just 0.9 percent in 1987 before growing again because of the fixed exemption. In 1997, when a bit more than 2 percent of estates owed tax, Congress again enacted a series of increases in the exemption that would have reached $1 million in 2006. Deaths resulting in estate tax liability stabilized until EGTRRA set off the latest inexorable drop in taxable estates.

Death and Taxes: Big IRS Bill Looms for Michael Jackson’s Estate

It seems like every time you turn on CNN or check Google News there is another story about Michael Jackson. However, when I came across this article from the Associated Press with the tagline “the Tax Man is in the mirror for the estate of the late King of Pop” it caught my interest. The story claims that Jackson’s estate could end up owing more then $80 million to the IRS.

“To settle his tax bill, the executors of his estate may have to sell or borrow against lucrative but hard-to-value assets or ask the IRS for a multi-year extension. That could allow the estate to pay the tab over time with earnings from Jackson's share in rights to songs by the Beatles and his own music — prized properties whose value will likely make the estate's tax bill only bigger.”

"The government is not going to take a Beatles record as payment. They want to be paid in cash," said Roy Kozupsky, a veteran estate lawyer in New York who has worked on behalf of several wealthy clients.

“Given the convoluted nature of Jackson's finances, coming up with the cash won't be easy. Technically, the tax bill is due nine months after the date of death. In special cases, estates can spread out the payments for a period of up to 14 years. Once paid, the tax bill could dramatically shrink the inheritance passed on to the pop star's heirs — his 79-year-old mother and three children.”

To learn more about how estate taxes are calculated, check out this entry I posted in June titled “Everything you Need to Know About Taxes After Death.”

Happy New Year - 2007 Tax Breaks

With a new year comes new tax breaks. On January 1st several new tax breaks went into effect. Some of the most noteworthy include higher limits on 401(k) plans and a decline in estate tax rates. For a detailed list on all of the changes in 2007 visit Post-Gazette.com. From every one at the office of Roni Lynn Deutch, A Professional Tax Corporation and the Roni Deutch Tax Center we wish you a happy and healthy New Year!