Wednesday, December 16, 2009

How Congress Turned Estate Taxes Into An Asteroid That Hits Taxpayers on January 1, 2010

The estate tax asteroid. If you have read my articles you know I have written many times on this topic. Recently I was asked, "Why do you call it an asteroid and why is it bad?" Those are great questions and this article provides the answers.

Let's begin by seeing where we stand as of 2009. The current estate tax rate is 45% and the estate tax exemption for 2009 is $3.5 million. This all comes to an end unless Congress acts on December 31, 2009, hence the asteroid. More on the impact results from the asteroid below.

Let's continue with what happens in 2010 and 2011 under current (on the books) law. In 2010 the estate tax is repealed for one year only. It is replaced in 2010 only with capital gains taxes on inherited assets because the "step-up in basis" is also repealed for 2010. Perhaps not too bad because the capital gains rate is less than the 2009 estate tax rate of 45%. Since very people can prove basis, you can calculate the impact by assuming inherited assets will have a 0 basis. There will be some basis step-up that can sprinkled on inherited assets.

The first problem with 2010 is that all the estate plans out there that are based on a formula relying on an estate tax exemption are in trouble. Second, there will be some unbalanced people with assets who jump off of bridges since they can die without an estate tax. See, the comment below from anonymous if you questions that.

Now that is the just the first impact results from this asteroid. It gets much, much worse.

In 2011 the estate tax returns in all it's fury with a 55% marginal bracket and only a $1 million exemption (the same structure in 2003). Again, this is current law if Congress fails to act. The asteroid's impact results become catastrophic come 2011.

I have excoriated Congress over this since 2002. Each year, the House has passed a fix and each year that fix has failed in the Senate. The same has occurred this year notwithstanding that there are bills pending in both houses that will prevent the asteroid from landing.

Let me know if you think that explains why the estate tax asteroid is so bad. Thank you for your interest and ongoing support.


  1. Didn't Kay Bell break the story that congress extended the 2009 estate tax laws, indefinitely?

  2. No. The House passed an extender but the Senate has not yet acted.