Estate and gift tax
President George W. Bush's plan for permanent repeal of the estate tax is being promoted as a boon to farmers and owners of small businesses. But the bill actually is something of a Trojan horse containing a "stepped-up cost basis" provision that will cost thousands of heirs more in capital-gains taxes than they would pay under less expensive reform plans offered by a Kansas congressman.Sounds good.
Imagine your parents bought a 5,000-acre farm for $500,000 in 1950, and it was worth $5 million when they died. Under the old rules, the farm's value would be "stepped up" to the full $5 million within six months of their death. If the heirs later sold it for $6 million, they would pay capital-gains tax on just the $1 million increase in value that occurred while they owned it.
In contrast, the estate-tax repeal (House Resolution 8) passed by the House of Representatives would value the farm at its original cost of $500,000 at the owners' death. If the heirs sold it for $6 million, they'd owe capital-gains tax on $5.5 million.
This formula applies to any capital gains, including stocks which could impose a staggering burden for heirs who might not have the paperwork from their parents' purchases of stocks over many years.
Most of us needn't worry much about the estate-tax revision, because both current law and the plan now pending in the Senate provide a $1.3 million capital-gains exemption for heirs and a $3 million exemption for a spouse. However, the farm example is significant for many throughout the Lebanon Valley, especially those who have been working the same land for generations and who, through their efforts and the passage of time, have seen the value of that land rise significantly.
Using the above example, the farmer with a $4.5 million capital gain could have passed $3 million of it to his spouse at his death and the remaining $1.5 million to his children. The children could deduct their $1.3 million exemption and pay tax on just the remaining $200,000 about $30,000 at the 15 percent federal rate, plus any state taxes. When the wife died, her heirs would receive another $1.3 million exemption, along with a tax bill of $255,000 on the remaining $1.7 million in capital gains.
But the heirs in our example would have paid no tax at all if a competing plan proposed by Rep. Dennis Moore, D-Kan., had passed. Moore would have raised the current estate-tax exemption of $1.5 million to $3.5 million for individuals and $7 million for a couple. That would effectively repeal the tax for 99.7 percent of all estates in the U.S. while costing the Treasury far less than the $290 billion over 10 years estimated in the Bush plan. And the Moore plan did not include the Trojan horse provision that would force many Americans to pay for their estate-tax "repeal" with sharply higher capital-gains taxes.
The Senate will soon offer its own take on this contentious issue.
The estate tax is good for everyone. No one deserves their parents' bank accounts. That's money the parents earned and had every right to spend on whatever they want. When they die, or if they decide to give it all to their kids (Estate and Gift Tax) it's just as taxable as any other source of income, and no less a "double tax" than sales taxes or Social Security and Medicare taxes. Taxing the estates of the very wealthy prevents an aristocracy from forming.
The problem people like to cook up is someone forced to sell a farm or family business to pay the taxes. Not that they can find examples of that, but they like to talk. Moore's solution is to raise the cap. The cap is the size of estate below which you pay nothing. That's a million and a half bucks now, and he would raise it to three and a half. That's a lot of money. If you're passing on 10 million dollars, maybe you should repay the government that gave you such success.
The estate tax repeal being contemplated would starve the government while leaving that bizarre loophole above, in which any proceeds from the sale of property above its purchase price would be taxed as capital gains, at a higher rate than the estate tax.
Moore would keep the estate tax, which has valuable social purpose, and save people some money.
That's the way to do things.