House Votes to Extend Estate Tax and Exempt $7 Million

The House today voted to extend the existing estate tax. It was due to expire in 2010 but then return in 2011 at an even higher rate than before. Estates are currently taxed at 45% for any amount over $3.5 million for individuals and $7 million for couples. While that seems like a lot, it includes real estate, family businesses, farms, etc. Family-owned businesses often bear the biggest brunt of the current estate tax, with heirs often having to sell the business to pay the tax liability.

The House today voted to extend the existing estate tax. It was due to expire in 2010 but then return in 2011 at an even higher rate than before.

Estates are currently taxed at 45% for any amount over $3.5 million for individuals and $7 million for couples. While that seems like a lot, it includes real estate, family businesses, farms, etc. Family-owned businesses often bear the biggest brunt of the current estate tax, with heirs often having to sell the business to pay the tax liability.

The tax was set to go to 0% in 2010 and then shoot up to 55% for estates over $1,000,000. That means a $10,000,000 taxable estate bequeathed by a couple would have had the following tax liability:

2009: $1,300,000

2010: $0

2011: $4,950,000

But that 2010 number is deceiving. If the estate tax is repealed, it will be replaced with a capital gains tax. The tax on everything over a $1.3 million exclusion would range from 15-28% on any appreciation of the asset since it was acquired. That means if an individuals parents purchased a home in 1960, the heirs would be on the hook for all of the price increase from the next 49 years. It’s better than being on the hook for 100% of the value but the $1.3 million exclusion is low. So assuming a gain of $6,000,000 on the $10,000,000 in assets, and a tax rate of 28%, the schedule would be:

2009: $1,300,000

2010: $1,316,000

2011: $4,950,000

While the government’s need for revenue has prevented the abolition of the estate tax, it is on the decline. The number of estates that pay any tax at all has shrunk from 1 in 50 to 1 in 500 according to the Center on Budget and Policy Priorities.

It’s not 100% certain that the existing estate tax won’t expire. The Senate must reconcile this bill with its own, the new bill must then be passed by both Houses before it can go to the President for signing. All of this must happen in the next 28 days.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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