Proven tax-reduction strategies can reduce estate tax liability as well as freeze its growth. But in order to do any comprehensive estate planning, you have to know every nook and cranny of the most current estate tax laws.
What exactly are the laws? They could be unchanged from previous years or they could be radically different by winter. No one knows for sure what the future will bring, because – at presstime <m> Congress was still debating whether to change the existing law or implement a new law.
“Here’s the quick summary,” says Robert N. “Bob” Greenberger, CPA, PFS and principal at Tauber & Balser P.C. “You die. The IRS gets about half of your entire net worth.”
Smart Business talked to Greenberger about the old law and possible changes to it, pending Congressional decisions.
Can you give us an overview of the estate tax?
The Economic Growth and Tax Relief Reconciliation Act of 2001 was the first step toward totally eliminating the estate tax. Prior to the law, the top estate tax rate was 55 percent; taxpayers could exempt from estate taxes $675,000 of their assets in 2001 and $1 million in 2002.
The 2001 law changed the tax rates and exemption amounts over the years 2002 to 2010. Through 2009, the top tax rates have a gradual reduction to 45 percent, and the amount exempt from tax rises to $3.5 million. The maximum tax rate for 2006 is 46 percent with a $2 million exemption in effect. In 2010, there is a one-year repeal of the estate tax with a reversion to the old rules (with a top 55 percent tax rate and $1 million exemption) in 2011.
What is the status of the potential permanent repeal of the estate tax?
The House has voted for estate tax repeal in every session of Congress since 2000. The House approved legislation to repeal the estate tax (H.R. 8) in April 2005. Supporters of estate tax repeal were dealt a blow on June 8th as a procedural motion on H.R. 8 was defeated in the Senate by a 57-41 vote. On June 22nd, the House passed an estate tax reform proposal by a vote of 269-156. As of this writing, the bill has not been sent to the Senate for consideration.
What proposals are on the table now?
Sen. Charles E. Grassley (R-Iowa), the Senate Finance Committee chairman, has proposed a $5 million exemption and 15 percent estate tax rate plan with a 30 percent rate for estates over $30 million. Sen. Olympia Snowe (R-Maine) has a $7 million exemption with rates starting at 15 percent and topping off at 28 percent for estates over $15 million. Many Democrats want to keep the exemption at a lower amount, perhaps $3.5 million, with a 35 percent tax rate. Sen. Joseph Lieberman (D-Conn.) said that he might support a permanent solution that would keep the tax at 2009 levels that would be a top 45 percent tax rate with an exemption of $3.5 million.
The estate tax reform passed by the House on June 22nd, H.R. 5638, the Permanent Estate Tax Relief Act of 2006, would increase the estate tax exemption to $5 million. Estates between $5 million and $25 million would be taxed at the same rate as capital gains, currently 15 percent, while estates over $25 million would be taxed at twice the capital gains rate. The proposed rates and exemption level would go into effect on January 1, 2010. H.R. 5638 also added a timber provision, creating a new 60 percent deduction for qualified timber capital gains, to entice the votes of several Senate Democrats.
Does your crystal ball predict a full estate tax repeal?
It’s unlikely because Congress faces difficult choices with budgetary implications. In recent years, the estate tax revenues have provided $30 billion per year with the amount expected to increase. Some estimates put the cost of full repeal at $80 billion to $100 billion per year. The Center on Budget and Policy Priorities estimated the 10-year cost at $800 billion. It is expected that the cost of H.R. 5638 would be about 75 percent of the cost of full repeal, which may prevent many Senators from supporting that bill.
So what should taxpayers do during this time of uncertainty with the estate tax laws?
I cannot emphasize this more: Do not sit on the sidelines and wait. It is imperative that taxpayers meet with their advisers before any tax law changes are implemented to take full advantage of any existing tax laws and to plan for expected changes.
ROBERT N. “BOB” GREENBERGER, CPA, PFS, is a principal at Tauber & Balser P.C. in charge of the tax department. He has served as an instructor on complex tax topics including “Buying and Selling a Business in Georgia.” Reach him at (404) 814-4949 or [email protected].
