What's at stake in estate tax debate
Current plan would exempt 40,000 estates from tax next year. Democrats say that gives too much to the wealthy.
This post is by Stephen Ohlemacher of the Associated Press.
More than 40,000 estates worth $1 million to $10 million would be expected to escape inheritance taxes next year under the deal struck by Republicans and President Barack Obama.
The package would leave only about 3,500 of the largest estates subject to federal taxes next year, a boon for the wealthy that many House Democrats say they can't accept.
The estate tax has emerged as one of the biggest obstacles to bringing Democrats aboard the tax cuts-employment benefits package negotiated by Obama and GOP leaders in Congress. House Speaker Nancy Pelosi called the lower estate tax "a bridge too far," while others in her caucus said it was a giveaway to the rich that would do little to create jobs.
The federal estate tax reaches fewer than 1% of inheritances, but it has long been a political lightening rod among lawmakers from both parties. Many Republicans want to eliminate the estate tax altogether, derisively calling it a "death tax" that makes it hard for parents to transfer small businesses to their children.
Estate tax opponents got their wish this year, when the tax was temporarily repealed. But the tax holiday will be short-lived because, under current law, the estate tax is scheduled to return next year with a top rate of 55% for estates larger than $1 million for individuals and $2 million for married couples.
The package Obama negotiated would set the top rate at 35% and exempt the first $5 million of an individual's estate. Couples could exempt $10 million.
At those levels, the tax would affect just 0.14% of all estates in 2011, or about 3,500 estates, generating about $11.2 billion in revenue, according to an analysis by the Tax Policy Center, a Washington research group.
Under the current law, more than 44,000 estates are projected to be taxed next year based on the number of estate-holders in that value bracket who are likely to die. That would generate $34.4 billion in taxes.
Many House Democrats are livid that Obama would give Republicans a major victory on the estate tax, especially when the rates are scheduled to go up so much next year.
"To out of nowhere throw in something that would not have any prospect of passing, I think, either chamber, is stunning," said Rep. Earl Pomeroy, D-N.D.
The overall tax package would extend for two years a sweeping array of tax cuts scheduled to expire in January, including those for the working poor, the middle class and the rich.
Republicans have lined up to support the overall tax package, looking at the lower estate tax as acceptable considering the rate increases scheduled to take effect under current law. It is a "sensible estate tax agreement," the U.S. Chamber of Commerce said.
The Family Business Estate Tax Coalition, a group working to repeal the tax, said the $5 million exemption for individuals and 35% rate "will provide much needed estate tax relief until full repeal becomes possible."
Republicans and business groups have long argued that families often have to sell or close family businesses in order to come up with the cash to pay the federal inheritance tax.
Supporters of the tax counter that the impact on family businesses could be reduced with some tax planning.
Sen. Blanche Lincoln, D-Ark., said uncertainty about the estate tax has made it harder for small business owners to invest in their companies. Lincoln, who was defeated for re-election last month, sponsored an estate tax bill with Sen. Jon Kyl, R-Ariz., that was used as a model for the agreement. She said the new agreement will allow small business owners "to invest in their small businesses, farms and ranches, growing those operations and creating jobs."
Other business groups, however, remain opposed to any federal estate tax.
"President Obama falsely claims that the compromise extends all of the expiring tax relief, when it actually brings the job-killing death tax back to life," said Dick Patten, president of the American Family Business Institute, another group dedicated to repealing the estate tax entirely.
The estate tax at a glance:
- The modern estate tax was enacted in 1916, imposing a 10% tax on the portion of estates above $50,000.
- The rate peaked at 77% from 1941 to 1976. From 1942 to 1976 it was imposed on estates larger than $60,000.
- By 2003, the top rate was 49%, on the portion of estates above $1 million.
- In 2003, Congress passed a law that gradually decreased the estate tax until it was repealed for 2010.
- In 2011, current law brings back the estate tax, with a top rate of 55% on the portion of estates that exceeds $1 million.
- The compromise negotiated by President Barack Obama and Republicans leaders would bring the estate tax back at a rate of 35%, exempting the first $5 million of an individual's estate and $10 million of a couple's estate from any taxation.
Sources: Internal Revenue Service; Tax Policy Center.
Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
More from MSN Money:
- 5 estate tax myths that won't die
- Your 5-minute guide to estate planning
- Protect your family with a partnership
- Too rich to live?
- 6 traps of estate planning
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.