To Repeal or not to Repeal, That is the Question (of the Estate Tax)
To Repeal or not to Repeal, That is the Question (of the Estate Tax)
Estate tax is a Federal tax levied on a decedent’s distribution of possessions to heirs identified by state law or will. Yet, the percentage of estates which are subject to the tax is very minuscule. The IRS reported that just over 2 percent of people who died in 2001 were subject to the estate tax.
When inaugurated, one of President Bush’s concerns was to phase out the estate tax, which resulted in the 2001 bill, reducing estate taxes. The Economic Growth and Tax Relief Reconciliation Act of 2001 generated a $1.35 trillion tax cut for the wealthy. By 2009, estates exceeding $3.5 million will be taxed phase out completely by 2010. For this reason, some have called the 2001 tax cut the “Paris Hilton Benefit Act.” Yet, Congress’s 2011 decision, whether to continue taxing estates, has become a heated topic in Washington. By analyzing the pros and cons behind repealing the estate tax, as well as a short insight into the gift tax, a better understanding of favoring or neglecting estate tax may be established and clearly evaluated.
Abolishing the estate tax decreases government revenues over ten years by $745 billion after 2011. Over these 10 years, the government will also lose $225 billion of interest from these funds; the total loss to the government is estimated to be $1 trillion. This deficit is catastrophic because it affects not only federal debt, but the funding of services for U.S taxpayers. Thus, tax cuts for multimillion dollar estates places further financial stress on healthcare, education, local homeland security, and Social Security. Another incentive to act in opposition of the repeal involves charities and foundations; such foundations include universities, museums, and churches which benefit from donations and inheritances. This being said, many high-income individuals bypass the estate tax by donating a great deal to charitable groups and nonprofit organizations. Repealing the estate tax would reduce this drive. According to the Congressional Budget Office, the repeal of the estate tax would decrease charitable bequests by 16 to 28 percent.
Small businesses and family owned farms applaud the termination of the tax in order to be tax free when passing down the business to next generations. Another change hurting small businesses is that as the estate tax is phased out, the step-up in basis will disappear as well. The step-up basis is the readjustment, upon inheritance, of the value of an appreciated asset for tax purposes. This change in step-up basis can negatively affect small business owners and farmers because a considerable amount of their wealth is in business asset form.
While discussing matters of the estate tax, it is also important to recognize the estate tax’s brother, the gift tax. The purpose of the gift tax is simple: if gifts were made throughout the entirety of one’s life, it would be possible to escape the estate tax completely. Gift and estate taxes coincide because gift transfers can greatly impact estate taxes. An example of gift taxes influencing estate taxes involves unified transfer tax credits. This tax credit establishes the amount of wealth which can be transferred between parties without incurring tax consequences. The two types of credits include the first which is available for taxable gifts and the second is available for transfers by death. For Federal income tax purposes, the unified tax credit can be exhausted only once (excluding exceptions). This being said, if the unified tax credit is used for gift purposes, it ceases to exist for estate tax purposes and vice versa.
If the estate tax is repealed taxpayers would more than likely see a change in the tax system. For example, Canada repealed its estate tax system in 1971. Today, a Canadian resident is considered to have immediately disposed of his or her assets prior to death. Thus, estates are subject to triggering capital gains tax on such assets at death under Canadian income tax. Compared to the United States, Canada has a significant increase in its capital gains tax, totaling 38.5% tax rate. The reason for such a high capital gains tax rate could be because of the termination of the estate tax. As a result, the United States might see similar capital gains tax consequences if the estate tax is repealed.
Today the estate tax has formed into a moral argument because it moderates the expanding gap between the wealthy and the poor. Revenues from the tax would help present more opportunity for those not inheriting riches. Some politicians want to keep the tax in order to force the rich to pay, while others would like to repeal it to save certain groups (farmers, small businesses owners, etc.) from its hardships. If Congress does not take action on the estate tax in 2010, the tax is kept relevant on January 1, 2011 with $1million exemption and a 55 percent tax rate. However, economic and political conditions will dictate the projections of the estate tax come 2011. Regardless of the debate among politicians, if the estate tax is repealed, another tax will most likely take its place. These pros and cons illustrate the difficultness for the United States government to repeal or sustain the estate tax for the year 2011.
Popular Tag :When inaugurated, one of President Bush’s concerns was to phase out the estate tax, which resulted in the 2001 bill, reducing estate taxes. The Economic Growth and Tax Relief Reconciliation Act of 2001 generated a $1.35 trillion tax cut for the wealthy. By 2009, estates exceeding $3.5 million will be taxed phase out completely by 2010. For this reason, some have called the 2001 tax cut the “Paris Hilton Benefit Act.” Yet, Congress’s 2011 decision, whether to continue taxing estates, has become a heated topic in Washington. By analyzing the pros and cons behind repealing the estate tax, as well as a short insight into the gift tax, a better understanding of favoring or neglecting estate tax may be established and clearly evaluated.
Abolishing the estate tax decreases government revenues over ten years by $745 billion after 2011. Over these 10 years, the government will also lose $225 billion of interest from these funds; the total loss to the government is estimated to be $1 trillion. This deficit is catastrophic because it affects not only federal debt, but the funding of services for U.S taxpayers. Thus, tax cuts for multimillion dollar estates places further financial stress on healthcare, education, local homeland security, and Social Security. Another incentive to act in opposition of the repeal involves charities and foundations; such foundations include universities, museums, and churches which benefit from donations and inheritances. This being said, many high-income individuals bypass the estate tax by donating a great deal to charitable groups and nonprofit organizations. Repealing the estate tax would reduce this drive. According to the Congressional Budget Office, the repeal of the estate tax would decrease charitable bequests by 16 to 28 percent.
Small businesses and family owned farms applaud the termination of the tax in order to be tax free when passing down the business to next generations. Another change hurting small businesses is that as the estate tax is phased out, the step-up in basis will disappear as well. The step-up basis is the readjustment, upon inheritance, of the value of an appreciated asset for tax purposes. This change in step-up basis can negatively affect small business owners and farmers because a considerable amount of their wealth is in business asset form.
While discussing matters of the estate tax, it is also important to recognize the estate tax’s brother, the gift tax. The purpose of the gift tax is simple: if gifts were made throughout the entirety of one’s life, it would be possible to escape the estate tax completely. Gift and estate taxes coincide because gift transfers can greatly impact estate taxes. An example of gift taxes influencing estate taxes involves unified transfer tax credits. This tax credit establishes the amount of wealth which can be transferred between parties without incurring tax consequences. The two types of credits include the first which is available for taxable gifts and the second is available for transfers by death. For Federal income tax purposes, the unified tax credit can be exhausted only once (excluding exceptions). This being said, if the unified tax credit is used for gift purposes, it ceases to exist for estate tax purposes and vice versa.
If the estate tax is repealed taxpayers would more than likely see a change in the tax system. For example, Canada repealed its estate tax system in 1971. Today, a Canadian resident is considered to have immediately disposed of his or her assets prior to death. Thus, estates are subject to triggering capital gains tax on such assets at death under Canadian income tax. Compared to the United States, Canada has a significant increase in its capital gains tax, totaling 38.5% tax rate. The reason for such a high capital gains tax rate could be because of the termination of the estate tax. As a result, the United States might see similar capital gains tax consequences if the estate tax is repealed.
Today the estate tax has formed into a moral argument because it moderates the expanding gap between the wealthy and the poor. Revenues from the tax would help present more opportunity for those not inheriting riches. Some politicians want to keep the tax in order to force the rich to pay, while others would like to repeal it to save certain groups (farmers, small businesses owners, etc.) from its hardships. If Congress does not take action on the estate tax in 2010, the tax is kept relevant on January 1, 2011 with $1million exemption and a 55 percent tax rate. However, economic and political conditions will dictate the projections of the estate tax come 2011. Regardless of the debate among politicians, if the estate tax is repealed, another tax will most likely take its place. These pros and cons illustrate the difficultness for the United States government to repeal or sustain the estate tax for the year 2011.