At the end of last year there was a lot of attention paid to the debates on Capitol Hill regarding a possible extension of what are called the “Bush tax cuts” that came about as a result of the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001. Included in these discussions was the possibility of a change to the estate tax parameters.
The estate tax was repealed for 2010, but when it was last in effect in 2009 the rate of the tax was 45% and the exclusion was $3.5 million. However, upon the sunset of the Bush cuts at the end of 2010 the estate tax rate was set to return to the 55% that was in place in 2001, and the exclusion was going to return to the $1 million that we had in 2002.
A bill was passed through Congress on December 16th and signed into law by the president on the next day that is now called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Among the provisions included in this measure was one that increased the estate tax exclusion to $5 million and reduced the rate of the tax to 35%.
These changes can seem like a best case scenario to some, but if you look at the matter objectively one could logically assert that the estate tax should be repealed permanently. There are four primary reasons for this, and the first one is the fact that in our tax code “death” is not an event that triggers what they refer to as “economic realization,” therefore tax liability. It is difficult to argue death as economic realization or gain.
Second, it is an instance of double taxation because the estate tax is levied on assets that you have left over after you paid taxes throughout your life.
Third, the estate tax is selectively imposed via the line in the sand that is drawn by the amount of the exclusion. And finally, the rate of the tax is excessive, whether it is 35%, 55%, or somewhere in between.
With regard to the question of whether or not an estate tax repeal is feasible, apparently there are members of Congress who feels that it is. At present no less than five bills have been introduced in the House of Representatives calling for a repeal of the estate tax, and it will be interesting to see how this matter plays out as the 2012 election season draws nearer and nearer.