May 26, 2010

What is the Current Status of the Federal Estate Tax?

Per the Bush tax cuts passed in 2001, the federal estate tax was set to gradually phase out through 2010. That is, estate tax liabilities would be reduced for the years 2005 through 2009 and then equal zero in 2010.

However, because the Bush tax cuts were temporary, the estate tax was always set to come back in full in tax year 2011 (i.e. revert to what the law would have been without the Bush tax cuts). In 2011, the estate tax would have an exemption level of $1 million and a rate of 55 percent.

So in a span of three years, the estate tax would go from an exemption level of $3.5 million and a 45 percent rate (2009 law) to no estate tax (2010 law) to an exemption level of $1 million and a rate of 55 percent (2011 law).

Most experts expected Congress to address this issue before January 1, 2010 so that family members facing the death of a loved one would not have the estate tax forcing them to make complex financial decisions at a difficult time, at least no more than it has in the past when the law was stable.

But a Congress that was preoccupied with health care didn’t address the estate tax last year so now the estate tax is in a state of temporary repeal. At the end of 2010, just as it was at the end of 2009, a few more or less days of life could make millions of dollars’ difference in tax liability for some estates. And if Congress changes the 2010 law, what would the ramifications be if it imposed the tax hike retroactively on those who have already deceased in 2010, as indeed Finance Committee Chairman Baucus has vowed to do?

Rarely has Congress allowed any area of tax law to deteriorate to a state of total disarray, as it has done with the estate tax.

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