By now you’ve no doubt heard at least something about it – “the tax bill” passed the Senate. The House takes it up today. Without the estate tax provision, we were set to go back to the way things used to be in 2001, well, kinda sorta. But wait – what is the estate tax anyway, and why should you care when you don’t have “an estate” anyway?
Ah, but you do! We all have “an estate.” At its most basic, that just means every single thing we own or owe when we die; that’s our “estate.” The question is whether you have a “taxable estate.” First, let’s back up a minute for a really quick estate tax history lesson.
There have been estate taxes since pretty much the beginning of time all around the globe. Here in the U.S., it started right around the days of the Revolutionary War. The granddaddy of our current estate tax system here was The Revenue Act of 1916.
Life as we’ve known it as Americans for at least the past 95 years or so, has involved estate taxes. What that’s meant is essentially this: When we die, we can all leave our loved ones whatever we have inherited ourselves and/or managed to accumulate and save. And up to a certain amount, the “exemption amount,” it doesn’t cost us anything in estate taxes to do so. Over the exemption amount, our estates will be taxed.
We can break down the heated debate over this issue into 3 questions:
- Should there be any tax on the money we leave our loved ones after we die? This is a philosophical and moral debate about which reasonable people can disagree just as much as whether we should have income, sales, or property taxes (or any taxes at all).
- If there should be an estate tax, should it be on all estates or only some? If only some, then what size estates should be able to pass tax-free and what size estates should be taxed? In other words, what should the exemption amount be? Again, there are philosophical undercurrents at work here – what’s fair? What’s sound economic policy? What’s moral? What is or are the goals of having an estate tax?
- After we decide what the exemption amount should be, we have to decide how much to tax every dollar over that exemption amount. What should the tax rate(s) be? Should there be a flat tax that applies regardless of the size of the estate? Or should it be graduated, to account for practical differences between the estates of multimillionaires and others of lesser means? What would be the effects of the size of the taxes be on the differently-situated people to whom it might apply? Should that matter?
Jump Ahead to The Current Estate Tax Law At Issue
In 2001, under George W. Bush’s administration, the Republican-led 107th Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), hence, “the Bush tax cuts.” One of the pieces of that act relates to the estate tax.
The law says that each year from 2001 to 2009 the amount of money people with over $675,000 (the “exemption amount” in 2001) could leave their loved ones without paying any estate taxes continued to go up and up (to $3.5 million by 2009), while the amount estates were taxed for every dollar over the increasing applicable exemption amounts simultaneously decreased (from a top rate of 55% in 2001 to a top rate of 45% by 2009).
Then in 2010 the federal estate tax was completely repealed…for one year only, until December 31, 2010. (as I wrote this time last year, tick, tock goes the estate tax clock!)
On January 1, 2011 the federal estate tax is scheduled to return to the 2001 levels, but keyed for inflation so the exemption will be $1 million and the upper tax rate will be 55%. That is, unless the House, which is as scheduled to take “the tax bill” up today, passes it in the same form that the Senate did. If so, then under the new law Americans will be able to leave up to $5 million free of estate taxes and every dollar over that $5 million will be taxed at a rate of 35%.
Stay tuned, I’ll keep you posted, and once we know the outcome, I’ll explain what this means for you and your family and why you should care. More soon….