Estate tax answers from the IRS, questions for the president
Thursday, August 18, 2011
Ever since Congress punted the estate tax ball -- I'm sorry, members actually dropped the ball and kicked it around the field for almost a full year -- back in 2009, people who've had to deal with death and taxes have had a heck of a time.
Here's a quick reminder of the estate tax situation for folks who've forgotten or were able to erase the legislative incompetence from their minds:
The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) began phasing out the estate tax. The amount of an estate that is exempted from the federal tax was gradually increased while the tax rate on what was taxable was lowered.
The estate tax was completely repealed in 2010, but for that tax year only.
Congress finally approved a new estate tax in December 2010 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This law reinstates the estate tax for 2011 and 2012 with an exemption of $5 million per person and a top tax rate of 35 percent.
If Congress doesn't act again in 2012 -- and don't expect anything until December of next year either -- then we're again looking at the $1 million estate exemption and a 55 percent top estate tax rate.
No-tax complications: When the estate tax was off the books for 2010, the U.S. Treasury lost a lot of money. George Steinbrenner and Dan Duncan estates alone could have provided nice payments to Uncle Sam.
But heirs also faced some no-tax complications.
When the estate tax expired, so did the option to value inherited property at what it was worth on the day that the previous owner died. This is known as stepped-up basis and can help a seller of inherited property face a much smaller capital gains tax when he or she decides not to hang onto to some of the asset.
Here's how that works, or doesn't, for heirs:
Uncle Bill left you his XYZ stock worth $100,000 on the day he died. By being able to step up the basis, the stock you now own is worth 100 grand and when you sell XYZ for $150,000 you'll owe taxes on only your $50,000 profit.
But with if you have to keep Uncle Bill's basis in the stock, known as carryover basis, you also inherited XYZ's basis of $25,000 since that's what Bill paid for the shares when he bought them in 1950 (to keep things simple for this illustration, we're not adjusting the basis). That means when you sell XYZ for $150,000 your profit is $125,000 ($150,000 sale price less $25,000 basis). And that means a larger tax bill.
Since Congress took so long to enact the estate tax measure, lawmakers decided to give estates where the individual died in 2010 a choice. The estate can apply the 2011 estate tax rules -- 35 percent tax rate and $5 million exemption with stepped-up basis -- or use the actual no estate tax law, but that means heirs must deal with the carryover basis of the property.
Sort of final word from IRS: Just how to do this, however, has been up in the air. The IRS has been working on getting the forms and regulations in place. The agency has finally done that.
The IRS has issued guidance to help taxpayers (and their estate executors and accountants/attorneys) cope with the carryover basis rules for the estates of people who died last year, when the estate tax was not in effect.
As for the form that will need to be filed, Form 8939, it's still in draft format. But the IRS presumably will have the final document ready by Nov. 15. That's the form's filing deadline.
Of course, that date might slip. Or at least that's the hope of the American Institute of CPAs. The professional organization has sent the IRS a letter asking it to extend the due dates for filing estate tax forms.
The AICPA wants the due date to be "90 days after the issuance, in final form, of whichever of the two forms [Form 706 and/or 8939], together with its set of instructions, is issued last."
That extra time, wrote Patricia A. Thompson, chair of the AICPA Tax Executive Committee, "will allow a reasonable period of time for the preparation and filing" of all estate related tax forms.
President fields estate tax questions: Meanwhile, while all the technical stuff about filing estate taxes was being worked out, Obama got some questions on the tax during his swing through the Midwest.
As a region that relies heavily on agriculture, farmers are concerned about what the estate tax might mean to them and those who will eventually get the land.
From a political standpoint, the possibility of the evil gov'ment taking over the family farm due to unfair tax laws is a potent piece of anti-tax rhetoric. The data, however, cast doubt on the claim that farmers and small-businesses are the main estate tax victims.
But that doesn't keep folks from worrying. And when you get a chance to ask the Commander in Chief about the estate tax, you do.
In response to a question about the possibility of going back to the tougher prior estate tax laws, Obama told the inquiring farmer:
"Well, there’s no reason why we have to go all the way back to the 2001 level. There is a compromise that has been discussed where you’d essentially have a $7 million exemption per family. There are some folks who just want to eliminate the estate tax all together. There are others who want to hike it up back to 2001.
There’s a mid-level proposal that would exempt most - almost all family farms and nevertheless would still hit folks like Warren Buffett and make sure that he is able to pay what he wants to pay in terms of passing on something not only to his family, but also to the country that has blessed him so much."
OK, that's not so much an estate tax answer as it is a chance to plug Warren Buffett's suggestion that the wealthy should pay higher taxes.
But the question and quasi-answer do indicate that the estate tax issue is not dead and will be part of any tax reform proposal that Congress might eventually get around to considering.
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