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House Extends Estate Tax Permenantly

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This week, the House of Representatives passed H.R.4154, titled the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009.” HR 4154 would amend the Internal Revenue Code to prevent the repeal of the estate tax next year. Under current law, there would be no estate tax for 2010 and your estate would transfer tax free to your heirs.

What is in the House bill? Thought many expect the bill not to pass in the Senate, the House bill exempts the first $3.5 million of a person’s estate and the first $1 million in gifts. Then the highest rate applied to the taxable portion of the estate would be 45%. CNN Money does some morbid math and claims that of the 2.5 million Americans expected to die in 2009, only 0.25% (5,500) have estates large enough to be taxable.

Many experts don’t expect the bill, with its current numbers, to pass in the Senate. In that chamber, there is a bipartisan proposal for a $5 million exemption and a top rate of 35%. Either way, it’s likely that some sort of estate tax law, perhaps a stop-gap measure tax for a year, will be passed. (Remember, for a bill to become law, both House and Senate must pass the bill, it must be reconciled, then signed by the President… so this bill has only made it through step one)

Despite my Democratic leanings, I’ve never liked the idea of an estate tax. The WSJ quotes Democratic Rep. Jared Polis of Colorado: “Estate taxes help prevent a permanent aristocracy from arising in this country.” While that sounds great on the surface, I bet the ridiculously wealthy, the 0.25% this targets, have long adapted to the estate tax. They have top notch lawyers and accountants setting things up so they don’t get caught.

Also, if I’ve earned my money fair and square, paid all my taxes on it the first time around, why take a piece after I die? Since I’ve never done any estate planning, I don’t know much about the loopholes and end arounds I can run on the estate tax (I bet there are plenty), I might be blowing this out of proportion (especially since the exemption is would be for $3.5M) but the idea of it bothers me.

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38 Responses to “House Extends Estate Tax Permenantly”

  1. Nick says:

    The idea of the estate tax is essentially like any other gift tax. Dead people don’t pay taxes, the taxes are paid by the living who are recipients of a windfall. I’ve never really understood the problem people have with the tax (I can see people complaining that the rate is to high but most people only complain about that after they start complaining about the fact that the tax exists).

    • Darin says:

      You’d understand the problem with the tax if you had to close your business (or sell it) or if you had to sell part of your land to pay for it.

      Don’t look to Warren Buffet to pay this tax, he’s giving his money away, so it won’t go to the government (and yet he complains that the rich don’t pay their “fair” share).

      Between life insurance and trusts, most of the really wealthy can get around it anyways, the people it hurts are the cash poor “rich” (people whose wealth is tied up in non-liquid assets).

    • Robert says:

      The reality is, they have already paid taxes on the money to the government. Why should the government get more after they are dead? That, in my mind would be similar to double jeopardy. It is immoral to tax the money again and especially at a 35-45% rate. If you were left a million dollars and the government came and took a significant portion of that, you would be ok with that?? So now maybe your sons/daughters can’t go to the school you wanted to send them to? It isn’t right. It is not the government’s money. They did not do one thing to earn it, took no risks to acquire it but yet they want to come and steal it.

  2. freeby50 says:

    Don’t assume that they paid taxes in the first place. Much of the wealth owned by the richest people was NOT taxed during their lives. They have capital gains which are untaxed unless the investment is sold. Stocks, real estate and business equity are large parts of the wealth and they fall under capital gains.

    http://www.cbpp.org/cms/index.cfm?fa=view&id=2083

  3. Jim says:

    You have to define *much*, because unrealized gains are unrealized… it’s still stuck in those pieces of paper (or bits in a database) and not in a bank account. Take the capital gains tax when they’re sold, I’m OK with changing that rather than having an estate tax.

  4. Seriously, this is THE BEST news I’ve heard from this administration! DOWN WITH THE DEATH TAX! US$7 million exclusion for couples is FANTASTIC! This is much more than I would have ever imagined.

    99% of Americans won’t have to pay a ridiculous 45% tax on their hard earned asset accumulation.

    Thank goodness.

  5. Estate taxes are the final indignity to the deceased and steal the product of their life’s work from the heirs.

    John DeFlumeri Jr

  6. Why does everyone assume large estates are the result of ‘hard work’

    Movie stars, professional athletes, some lottery winners, those who inherit wealth and couldn’t make a dime on their own: they are rich – and did little to earn such wealth.

    Don’t forget bankers, and traders who work for banks – and their 7 figure bonuses.

    Not everyone deserves to keep wealth forever.

    • Jim says:

      I disagree. Movie stars and athletes provide entertainment and they’re paid for that. Just because you don’t value it doesn’t mean society as a whole doesn’t. To point the finger at bankers or other convenient scapegoats ignores the clear fact that many of the conveniences we enjoy are the result of creative financing. Is it right? Perhaps not, depending on your belief system, but that’s how the world works today.

      I don’t have an opinion of who can or can’t keep their wealth but I surely don’t believe the government has the right to redistribute it.

      • And there’s also the issue that movie stars and athletes actually do work quite hard to achieve their level of performance. You don’t fall out of bed and become an Oscar winning actor or baseball MVP. In many cases, they beginning training for their jobs at a very young age.

        • Jackson says:

          Exactly. And a lot of these movie stars and athletes take a big risk in pursing their career in the first place, instead of taking a safer and more secure route.

    • CK says:

      Who cares how you got the money as long as it was legal. Those who are against others leaving large sums of money to heirs strike me as just jealous. It’s their business not your own.

    • Marc says:

      Why so bitter mark? It must be because you’re a communist living in a democracy. It’s not up to you or the government to decide weather or not an actor or athlete or anyone else worked hard and “earned” their money. The government sure didn’t work hard for it. It’s your money, if you want to pass it to your offspring, the government has no right to take it. Period.

  7. Ryan says:

    Jim, I totally agree. Anytime a government needs money the only way they’ll find to get it is to find more taxes to collect from people. Since the wealthy only occupy a small percentage of the population, “WE” don’t care as much about it. It’s as if we’re speaking of fairy tales in this comment log. I also do not agree with the estate tax, you nailed it. They’ve taxed the money when someone previously earned it, and this is just something that they can slip under the radar because “WE” (the low earning, relatively unwealthey) don’t bug our congressman about preventing it. It will also be used to “help” us with services that must of “US” (the middle class) wont’ need. Take more of the upper class money and distribute it to the lower class. It wouldn’t surprise me if Obama signed it anyway, seeing as most of his constituency (not him) resides in that lower class. I mean, you gotta help a brotha out, you know?

    • Jim says:

      The government is finding more and more ways to borrow from the future. The 2010 Roth IRA loohole, where you can convert a Traditional IRA to a Roth IRA even if you earn over $100,000, is one such example. There will come a time when we can’t just tax the future to pay for today.

      • Shirley says:

        “There will come a time when we can’t just tax the future to pay for today.”

        I truly believe that time is much closer than most of us think.

  8. Stonewall says:

    Warren Buffett is playing it smart. Self directing his estate prior to death is lot smarter than letting the government direct it.

    Hire a good tax attorney.

  9. Michael says:

    “if I’ve earned my money fair and square, paid all my taxes on it the first time around, why take a piece after I die”

    No money is taken from you (the deceased) it’s taxed from the heirs. Money is taxed, saved then spent/transferred and re-taxed in most commercial transactions everyday, why is this different? Also, as the transferred stocks and real estate basis are stepped up, much of the large estates weren’t even taxed once.

    The best legacy to leave my heirs is a stable society with government in balance, strong defense, thriving middle class and the opportunity to succeed, not gobs of cash, never earned, never valued by always-wealthy offspring. $3.5M tax-free is more than enough to get a start in life, I started with much much less…

    • Jim says:

      I consider my money to be one and the same with my family, to include children. If it was taxed once, as income or capital gains, why tax it again if I transfer it to my children? It’s irrelevant who is taxed, the fact is the dollar earned was taxed already, why should the government feel the need to tax it again?

      I understand the importance of a stable society and $3.5M is certainly enough, but it’s the principal of the idea. If you’re OK with 3.5M, why aren’t you OK with 10M? Why not demand the limit be $1M? or $500k?

      • NateUVM says:

        Because you have to draw the line somewhere… Everyone’s going to have an opinion on this. The constructive question really is, “What’s wrong with $3.5m?”

        And just because a dollar is taxed once, doesn’t mean it doesn’t get taxed again:

        - I earn a dollar. I pay taxes on it.
        - I spend that dollar. The retailer that receives it from me gets taxed on it.
        - Etc…

        So, I have no problem with people who haven’t earned it getting taxed, at some point (+$3.5m), for something that is simply another transfer of assets. I mean, do we have a problem with gift taxes, too? Because it’s essentially the same thing…

        • CK says:

          The whole point is you don’t have to have a line. The yearly gift tax limit functions more as a law enforcement tool so you have a hard time getting rid of it.

    • Marc says:

      Again, its not up to you to decide what to do with my money. I know very well what to do with it, and giving it to the government to waste is not what I have in mind. You have no right to decide how much is “more than enough” for anyone other than yourself.

      • saladdin says:

        Exactly! We all should take our own money, hoard it up and move to the mountains where nobody else can find us. If someone stumbles upon our home we can just kill them and let god sort ‘em out.

        saladdin

  10. Damon Day says:

    I am with you Jim. The Death Tax is just another way for the greedy politicians that can’t control their spending to stick it to us. Darin is right on about it really hitting farmers and other estates that have a lot of land.

    Oh, and I call BS on Polis claiming this is to prevent a permanent aristocracy. Please, who does he think he is kidding with this garbage.

    The affluent simply set up everything in various types of trusts. The Trusts do not die. Therefore the assets are not transferred in the event of a death. It isn’t difficult to do if you have a few hundred thousand bucks on hand to put everything in order.

    These types of taxes are set up as a way for the current aristocracy’s to prevent what can be termed as nouveau riche (meaning “new money”) from rising up.

  11. Tax, tax, tax, spend, spend, spend. That is what these people think is the answer to all of the problems facing this economy and all they are doing is making things worse. They can not tax and spend their way out of this recession.

    • Jim says:

      Well, that’s how you get out of a recession, you spend your way out… what’s the alternative?

      • saladdin says:

        Of course you can spend your way out of a recession. Look at the formulas. Economic growth is based on spending. Economic growth leads to a greater standard of living.

        saladdin

        • Fred says:

          You can spend your way out of a recession. But don’t confuse Government spending with individual spending.

          The issue is whether you’re spending in the most efficient way.

          Government spending over the long run is always less efficient than market spending. That is, the Government allocates dollars in places where those dollars aren’t maximized.

          Since the Government must get its money somewhere (taxes, printing), they are actually inhibiting efficient market spending…

          • saladdin says:

            Don’t buy it. The “free market” would never spend money on public parks or libraries because there is no profit in it. If efficient was the way to go then you can cut out all of these. It’s a balancing act.

            We would still be driving on dirt roads because no private company has the money, resources and there is not enough profit potential. This is why it took the government to get the railroad system kicking. The government’s inefficient spending does have positive returns.

            Also, from the articles I have read it is government spending is the most efficient way to increase GDP even before tax cuts.

            saladdin

  12. Fred says:

    Great article Jim.

    On the concept of ‘double-taxation’ being immoral – it happens all the time and we accept it all the time. We pay both federal and state income taxes. We pay sales, use, and import taxes after we’ve already paid income taxes on the money we’re spending. We pay gasoline taxes on fuel we put into cars that we pay registration taxes for, and this after we paid sales taxes to purchase those cars. We pay property taxes on houses that we pay transfer taxes on; we pay taxes to heat and cool those houses; and we pay excise taxes for communications services on those houses.

    On estate taxes preventing an aristocracy – I actually think this is an OK argument for these taxes… One commenter mentions Warren Buffet giving his money away… This is one positive effect of an estate tax – it encourages people to give to charity at the end of their lives, or to leave their estate in a charitable trust.

    Of course, it does hurt those with a family farm or other business that has a great deal of money tied up in assets. And for those folks, there are ways to work around this issue (for instance, loans to pay the tax, or a payment plan with the IRS).

    • saladdin says:

      Does land not get stepped up basis upon death?

      saladdin

      • Capital assets, including land, get stepped up upon death. My mom and dad sold their farm a few years back. During the process, my dad was diagnosed with lung cancer and died shortly thereafter. The sale was final after he died (it wasn’t intentionally delayed; the timing just worked out that way). My mom inherited his half of the farm (his estate) at stepped up basis, meaning that there were minimal capital gains on that half of the farm (while she incurred capital gains on 30+ years of appreciation on her half).

        Had they sold the farm a few months earlier, they would have paid quite a bit more in taxes.

  13. zapeta says:

    An estate tax at 3.5 or 5 million is fine with me. I doubt highly that I’ll have a net worth that high by the time I die.

  14. Chris says:

    Death and Taxes…and then more taxes.

  15. cubiclegeoff says:

    Although Warren Buffett may not be paying the estate tax, his money is at least going to to some good for the world. I like this quote myself from him: “Wealth is just a bunch of claim checks on the activities of others in the future. You can use that wealth in any way that you want to. You can cash it in or give away. But the idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society.”

    Although some people have worked hard for their wealth, it’s easy to forget that many of those people gained wealth off the backs of others. They never do it alone, unless they inherit it. I like to think of the estate tax as attempting to give the rest their share.


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