Sunday, February 19, 2017
The Eternal Whipping Boy
The Estate Tax, or as it should be know, the capital gains tax on previously untaxed earnings, is once again in the Republicans sights. Despite it bringing in a significant amount of revenue while doing no harm to anyone and, indeed, affecting only a few percent of the population, the wealthy owners of Republican Party have a particular jones for this tax.
The future of the estate tax is in debate again. President Trump promised to eliminate it during the campaign last year. “No family will have to pay the death tax,” Mr. Trump said at the Detroit Economic Club in August. “It’s just plain wrong and most people agree with that. We will repeal it.”Simply put, the Estate Tax affects very few people, but the taxes and fees necessary to replace the lost revenue will fall on all of us.
Whatever happens, statistics show that very few families actually pay the tax — and those that do are subject to a series of interconnected other taxes.
“It’s easy to say, ‘Repeal the estate tax,’ but it’s like squeezing a balloon,” said Alexander A. Bove Jr., an author and estates lawyer with Bove & Langa in Boston. “Something has to give when you do that.”
Estates are now taxed at 40 percent. But with an exemption of the first $5.49 million per individual — and nearly $11 million per couple — the average effective rate can be much lower. Using Internal Revenue Service data from 2013, the Urban-Brookings Tax Policy Center calculated that the average size of estates paying the tax that year was $22.7 million, and that they paid an effective rate of 16.6 percent.
Few estates are large enough to require any payment. In 2015, only 11,917 estates filed I.R.S. Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return”; 4,918 of them owed any tax, paying a total of $17.1 billion.
“This tax paid by very, very wealthy people and the rate they pay is reasonable,” said Chuck Marr, director of federal tax policy for the liberal-leaning Center on Budget and Policy Priorities. “A lot of this money has never been taxed before. Working-class people pay payroll taxes every week, and for wealthy people that’s not how it works.”
One big advantage the current estate tax gives to wealthy heirs is in the treatment of capital gains, which are taxed at a rate of 0 percent for anyone in the 10 and 15 percent income tax brackets, 15 percent for most others, and 20 percent for anyone in the top 39.6 percent bracket. But under current rules for estates, no capital gains are paid on assets up to the exempt level, and assets over that amount pass to heirs at the current market value, shielding them from tax on any gain in prices that may have already occurred. The I.R.S. found in 2015 that stock and real estate — assets likely to appreciate — made up more than half of all estates subject to tax.
Resetting the cost-basis, or value, of an inherited asset can be an important benefit. “The person who inherits it can sell it with no tax,” Mr. Bove said. “That’s a big advantage when you combine it with the exemption of almost $11 million for a couple.”
The estate tax has two siblings, the gift tax and the generation-skipping tax.
The gift tax is imposed on any transfer of more than $14,000 in one year to any single individual. The total value of gifts given during someone’s lifetime lowers their estate tax exemption.
The generation-skipping tax applies to gifts larger than the estate tax exemption that go to anyone 37 years and 6 months younger than the gift-giver. It’s devised to keep wealthy families from avoiding one generation of estate tax by transferring the money directly to grandchildren.
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