Buffalo News

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Senate’s failure stuns experts

Lack of action on estate tax may cause problems

January 10, 2010, 6:41 AM

Just a few weeks ago, it was unthinkable that Congress would allow the federal estate tax to temporarily disappear for a year.

At the very least, Congress was expected to adopt a short-term patch that would maintain the estate tax and give legislators time to craft a permanent solution.

But the Senate — let’s put the blame where it belongs — has failed to act while consumed by health care reform. The federal estate tax that’s been around since 1916 ceased on Jan. 1. It’s set to come back in 2011, but under much more stringent rules than previously.

“Everybody is really annoyed and confused. And there is not a lot of planning you can do,” says Laura Peebles, a director of Deloitte Tax.

A Senate leader has promised to make a retroactive fix early this year so this doesn’t happen. But some tax experts suggest that a retroactive tax increase may be unconstitutional.

In the interim, a little-noted provision in the law would expose many smaller estates to higher tax liabilities.

Until Jan. 1, the value of inheritances above $3.5 million for individuals and $7 million for couples were taxed at a 45 percent rate by the federal government. Smaller estates were exempt from the tax, leaving less than 1 percent of all inheritances subject to the tax. Because of the lack of action by Congress, the estate tax now goes away only to reappear in 2011 with a higher, 55 percent rate.

During the interlude, many estates will be subject to a capital gains tax that they are now exempted from. The capital gains levy would tax the difference between the original price a decedent paid for an asset and the price it fetches when it is sold. (Emphasis added)

For example, stocks, land or other assets purchased for $200,000 a half century ago and sold for $2 million now, would be subject to 15 percent capital gains taxes on the $1.8 million in appreciation. The first $3 million is exempted for spouses, and the first $1.3 million is protected for other heirs. Still, analysts say the capital gains tax will hit many more inheritances than the current estate tax.

More . . .

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