The fact that the estate tax was repealed for 2010 as a result of a provision contained in the Tax Relief and Reconciliation Act of 2001 has been a hot topic, but of course it is returning in 2011. Far from considering an expanded or permanent repeal, there are actually whispers circulating that Congress may try to impose the estate tax retroactively on those who avoided it in 2010. However, if you want to look at the facts objectively, one can make a very strong case for the permanent repeal of the estate tax.
There are so many reasons why the estate tax is suspect it is hard to know where to begin, but let’s just focus on selectivity in this article. The government decides who does and does not have to pay estate tax, and they can change their mind from year to year. From 2006 through 2008, the estate tax exclusion amount was $2 million. If the total value of your assets fell below that number, your heirs paid no estate tax. In 2009 the exclusion was $3.5 million. In 2011 it will be just $1 million.
So if you die in 2011 with $3.5 million worth of assets, $2.5 million of them will be taxed. The top rate in 2011 is 55%, so the tax liability is $1.375 million. Your neighbor who passed away in 2009 with $3.5 million in assets paid nothing at all.
In addition, all Americans who will pass away in 2011 with estates valued at a million dollars or less will pay nothing. Let’s compare Mandy who passes away in 2011 with an estate worth $1 million. Her heirs have no estate tax liability whatsoever.
But Harry down the street dies a month later, and he is unfortunate enough to have accumulated $2 million in total assets during his lifetime. The second million is going to be taxed at 55%, so his heirs get a total of $1.45 million, and Uncle Sam gets $550,000. Mandy’s heirs paid zilch on a million; Harry’s family paid a small fortune of over a half a million dollars to the IRS on assets totaling just twice those of Mandy’s. That is quite a swing.
This tax stands on no logical ground. It was repealed in 2010 and the sky didn’t fall, so perhaps we should repeal the estate tax permanently and allow people to pass along their hard earned assets to their heirs free of this harsh and inconsistently applied levy.