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Death Tax Compromise Protects Thousands of Estates from the Tax

1 min readBy: Scott Hodge

One of the most debated provisions in the current taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. deal between President Obama and the Republicans is over the reinstatement of the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , which was allowed to expire for all of 2010. On January 1st, the estate tax rate is scheduled to rise from the current rate of zero to 55 percent on estates worth more than $1 million. Under the Obama/Republican agreement, the estate tax rate will instead rise to 35 percent on estates larger than $5 million ($10 million per couple).

While the difference between $1 million and $5 million may not seem large to some people, it is remarkable how many estates will be protected from the tax by the higher exemption level. According to an estimate by Congress’ Joint Committee on Taxation, there would be ten times as many taxable estates between $1 million and $5 million under current law (with the top rate of 55 percent) compared to the number facing higher taxes under the compromise deal (with the top rate of 35 percent).

The table below also indicates the number of farm and small business estates protected from the estate tax because of the compromise deal. Should current law be allowed to kick in on January 1st, 2,600 farm estates valued between $1 million and $5 million would be hit with the 55 percent rates. By contrast, 200 farms would be affected by the compromise deal. Similarly, 1,700 small business estates would be effected by current law compared to 200 under the compromise plan.

Ideally, there should be no estate tax, but the compromise plan at least shelters the smallest and most vulnerable farms and small businesses from this onerous tax.

Estates between $1 and $5 million
(Current Law 55% rate)
Estates above $5 million
(Compromise 35% rate)
Filers in 2011 82,800 9,300
Taxable Estates in 2011 39,800 3,900
Farming Taxable Estates 2,600 200
Small Business Taxable Estates 1,700 200
Source: Joint Economic Committee