Weeks after the election, there are still many ‘why did Hillary Clinton lose‘ discussions. But one possible explanation that so far doesn’t seem to be taken seriously–if is is mentioned at all–is the death tax. That surely was not it. After all, relatively few people pay it. Yet it remains terribly controversial and it generates discussion that has a kind of emotional fervor most tax issues do not generate. Dilbert creator Scott Adams called it confiscation when he explained why he switched from Clinton to Trump. Just consider the fact that Secretary Clinton wanted to raise the estate tax to an astounding 65%, while Donald Trump vowed to repeal it. And with a Republican House and Republican Senate, he just might.
He is after other taxes too, of course, such as those enacted as part of Obamacare. But in some ways, the estate tax is an annoying throwback that can make people’s blood boil, even if it is not widely paid. Current law exempts estates worth $5.45 million or less. Beyond that, you pay 40%. A number of Democrats, including Secretary Clinton, called for whittling the $5.45 million figure down to $3.5 million, and upping the 40% estate tax rate to 45%. Then, as the election drew near, she proposed much higher 50%, 55%, and 65% estate tax rates, depending on your wealth. The proposed 50% rate was for estates worth over $10 million per person, 55% for estates over $50 million, and 65% for estates exceeding $500 million.
President Elect Trump wants to repeal the estate tax entirely. More than a few commentators have noted that Mr. Trump himself stands to benefit enormously from such a plan, as would his heirs. Yet it would benefit many others too. Steadfast proponents of the estate tax are not ready to give up, of course. They argue that it helps to stop wealthy people from getting even wealthier. But given that income taxes must be paid on earnings that eventually make up the estate’s value, opponents claim that the tax is a true double tax having no place in America. As Candidate Trump said on August 8, 2016 in Detroit:
No family will have to pay the death tax. American workers have paid taxes their whole lives. It’s just plain wrong and most people agree with that. We will repeal it.”
Strangely, another argument for the estate tax is that you can plan around it. Yet that is becoming more and more difficult. The notion that clever and wealthy people can find ways around the tax may be changing, with new administrative rules that make valuation discounts scarce and worth less. In any case, planning to avoid the estate tax is expensive and requires years of planning. Wealthy or not, the estate tax catches many people off guard after they have worked and paid income tax their whole lives.
It can force sales of family companies, and sales of family farms and ranches. Ironically, it was only recently–in 2013–that Americans finally got some certainty with a $5 million per person exemption. Indexed for inflation, it now stands at $5.45 million, $10.9 million for a married couple. And the Republicans want it repealed. Conversely, House Democrats want to raise the estate tax materially.
Notably, the Sensible Estate Tax Act of 2016 would slash the estate tax exemption to $3.5 million and raise the tax rate to 45% as detailed here. Moreover, not long ago, President Obama argued that allowing a basis step up on for income tax purposes on death was a huge loophole. He proposed no basis step up, hoping to raise approximately $200 billion over the next decade. When combined with state estate taxes, this proposal would yield the highest estate tax rate in the world.
Small and family businesses can be particularly hard hit. Already, it is hard for many family-owned businesses to stay afloat after the death of a key figure. Not all of the reasons are managerial. Many are financial, and taxes can force a sale. Stephen Moore of the Heritage Foundation calculated that by eliminating basis step up, we would end up with the world’s highest estate tax rate. Dick Patten, chairman of the Family Business Defense Council calculated an effective death tax rate of 57%. If you add in state inheritance taxes, the combined tax rate could go as high as 68%.
President Elect Trump will surely dampen any such discussion and push for repeal. And with Congress’ help, it just might happen at last.
For alerts to future tax articles, email me at Wood@WoodLLP.com. This article is not legal advice.
via The Tax Lawyer http://ift.tt/2gAXVeT