Posted Wednesday, August 11, 2010 ; 10:15 AM | View Comments | Post Comment
Updated Wednesday, August 11, 2010; 02:55 PM
The federal policy will apply to estates valued at $1 million or more.
By Walt Williams
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If you’re very wealthy and want your children to inherit your belongings without paying taxes, here’s a tip: Die now.
The federal estate tax – more infamously known as the “death tax” – was suspended at the beginning of the year and is currently on hiatus.
That means any transfer of property through inheritance currently isn’t taxed, but it won’t stay that way. The tax will come back next year at a higher rate than it was before the temporary repeal went into effect.
President Barack Obama has instead proposed freezing the tax at its 2009 level, when estates were taxed at 45 percent of their value. However, many liberal groups want a tiered system where the richer you are, the more you’re taxed.
They argue the rich couldn’t have enjoyed their wealth if it weren’t for the services that government provides, from the security of a strong military to a robust infrastructure that allowed them to do business.
“We firmly believe the people who have these enormous estates are the people who benefit the most,” said Steve Wamhoff, legislative director for Citizens for Tax Justice.
The estate tax generates a lot of anger for a tax that few people actually pay. When it was suspended at the end of 2009, only estates valued at $3.5 million or more were taxed.
It has slowly phased out since 2001 thanks to tax cuts pushed through Congress by President George W. Bush. The year before he took office, individuals had to pay a maximum 55 percent tax rate on the value of their estates above $675,000.
Bush’s tax cut gradually increased the exemption while lowering the maximum tax rate. The exemption jumped to $1 million and then to $2 million. At the same time, the tax rate dropped below 50 percent.
The tax will come back in 2011 at the 55 percent rate if Congress does nothing, but it will apply to estates with a value of at least $1 million per individual.
A report by Congressional Budget Office found that 108,000 estates nationwide filed to pay the tax in 2000, but only 9,800 of them would have had to pay under the 2009 level. In West Virginia, the number of estates pay the tax has shrunk from 245 in 2000 to 60 in 2008, according to Citizens for Justice.
The suspension of the tax means the federal government has missed out on some potential windfalls. One of the more famous examples is George Steinbrenner, owner of the New York Yankees, who died earlier this year. Another is Dan L. Duncan, a Texas businessman whose personal wealth was valued at $9 billion at the time he died, according to The New York Times.
Critics of the tax see little reason Congress should keep it. The Tax Foundation, a nonprofit organization that generally advocates against tax increases, noted in a recent report that the tax generates about $25 billion a year, which is distributed widely among federal government coffers and therefore has a small impact on the overall budget.
The authors also said the tax was absurdly complex, making it difficult for individuals to plan their estates.
The conservative Heritage Foundation argues that the tax discourages savings and investment and therefore undermines job creation.
“Because it is a tax on capital, it is destroying some 1.5 million jobs that the economy desperately needs as it struggles to recover,” Curtis Dubay, a senior tax policy analyst for the foundation, wrote in a July 20 report.
Many federal lawmakers note government needs the money given the looming budget deficit. Obama has proposed letting many of Bush’s tax cuts for the wealthy expire while retaining those aimed at the middle class.
Still, the compromise touted by Obama isn’t satisfactory for Citizens for Tax Justice and more than 70 other organizations that think lawmakers could do better. They want a “responsible estate tax” that bases the percentage of the tax on the value of an estate.
Their proposal would tax estates above $3.5 million but less than $10 million at 45 percent; between $10 million and $50 million at 50 percent; and estates above $50 million at 55 percent.
There also would be a surtax of 10 percent on taxable estates worth more than $500 million.
Citizens for Tax Justice noted the estate tax they back wouldn’t tax 99.75 percent of estates.