I’ve given reporters quotes all year saying the Democratic Congress would never permit the one-year repeal of federal estate taxation. Maybe I was wrong, as Politico reported this morning on Democratic procrastination.
Barring some reversal, the standoff means the levy will drop to zero for the first time in decades on New Year’s Day — a long-time goal for conservatives … the episode is highly embarrassing for Reid and the White House for failing to address the deadline earlier.
Estate taxes are scheduled in law to be totally repealed on the first day of 2010, but then one year later to spring back to life with rates and exemptions the same as they were in 2001. The conventional wisdom was that the Congress would extend 2009 law (45% top rate with an exemption level of $3.5 million for individuals and $7 million for couples) through 2010, essentially buying a year to figure out what to do with it.
If the repeal goes through, people who die during 2010 will pay no 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. . Many ghoulish jokes have been made on this subject, usually involving the post-dating of death certificates for people who actually died this month (there’s a Christmasy thought), or the pre-dating of deaths that actually occurred in January of 2011. We’ll say nothing of the possibility that people would hasten someone’s death as the end of 2010 approached.
The step-up in the basis is a more obscure but still important 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. provision. It grants tax forgiveness on capital gains in an estate even if the estate isn’t large enough to be taxable. For example, if a person dies with an estate whose most valuable asset was stock that reflects a gain of $1 million, the stock could be inherited at the new, higher basis (value) but without paying the tax on the gain. This is the “step-up” from the old basis to the new. The linkage of the step-up to estate taxation has been maintained by politicians who favor keeping the estate tax because it creates a large, well-connected group of taxpayers who benefit from the presence of the estate tax.
For more info, here’s a good plain-English report on estate taxes. And here’s recent data on estate tax collections.
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