WASHINGTON — The death tax died at midnight Thursday.
As a result, wealthy Americans can give up the ghost without surrendering a huge chunk of their estate to the Internal Revenue Service.
Democrats in Congress are vowing to change that. Citing projections from Congress’ accounting arm, the Congressional Budget Office, they say complete elimination of the estate tax would add more than $500 billion to the national debt over the next 10 years.
In 2001, the Republican controlled Congress passed changes in the tax laws, which gradually reduced estate taxes each year.
The tax vanishes completely this year. However, barring new legislation, it will reappear in 2011 - entitling the IRS to claim up to 55 percent of estates, although the first $1 million will be exempt from taxation.
The uncertainty creates headaches for estate-tax advisers.
“It’s a real mess for planners,” said Eric Toder, a senior fellow at the liberal Washington-based Tax Policy Center. “People are sort of in limbo.”
The tax change won’t affect the estates of nonmillionaires. But, in what Toder calls a “quirk in the law,” many heirs will be subject to higher capital gains taxes on estates left behind by family members who die this year.
That’s because as part of the 2001 tax cuts, Congress changed how capital gains taxes will be calculated this year. Rather than tax assets at their value when acquired, the new rule makes them subject to a tax at their current value if a sale takes place.
For instance, under the old rules governing capital gains taxation, if someone bought a stock at $10 a share, and saw the value of that stock rise to $100 at the time of his death, his heirs would need to pay taxes on only the original $10 value if they sold the stock.
But under the new rule, the $90 increase in value would be subject to the capital gains tax, which is capped at 35 percent, depending on the tax filer’s income. The first $1.3 million in gains - $3 million if the gains go to a surviving spouse - are exempt from the tax.
Before Congress adjourned in December, the House passed a bill that would restore the estate tax this year, but an attempt to do so in the Senate failed.
“Many small businesses and family farms that never would have owed any estate tax will end up with a new capital gains tax burden and face a sizable tax increase,” wrote the Center on Budget and Policy Priorities, a liberal Washington advocacy group, in a December paper.
The center cited John Buckley, chief tax counsel for the House Ways and Means Committee, who projected that 71,400 estates would be subject to the capital gains tax in 2010. A separate Tax Policy Center analysis estimated that the estates of 5,490 people -less than 1 percent of taxpayers - would owe estate taxes if the 2009 rules were allowed to continue.
Toder, of the Tax Policy Center, said people facing the tax have accumulated some wealth, but are not the upper crust.
“I wouldn’t say it’s the super rich, but it’s much larger than the estate of the average American,” that will face the new levies, he said.
Bill Ahern, policy director at the Tax Foundation, a conservative Washington group that advocates for lower taxes, said groups that are highlighting the new tax are largely protax groups that are trying to gin up support for reinstituting the estate tax when Congress reconvenes later this month.
“Most of the outrage about this is phony,” he said.
In a nonbinding budget agreement last year, Arkansas’ Sen. Blanche Lincoln, a Democrat, successfully pushed to raise the exemption on estate taxes in 2011 to $5 million for individuals and $10 million for couples, and to set the rate at 35 percent.
She’d like to pass something similar this month that has the force of law, and can be made retroactive to cover estates left behind because of early-in-the-year deaths that aren’t subject to the tax.
She said that the $3.5 million exemption that is plannedfor when the estate tax returns isn’t adequate to keep small farming operations and family firms in business.
“Families are going to have to sell their small businesses to conglomerates,” she said.
Meanwhile, estate planners say that the uncertainty about what Congress will do makes it difficult to dole out advice. However, they did suggest people double-check thewording of their estate plans.
“A lot of people’s estate plans have not been modified for the estate tax’s one-year hiatus,” said Scott Fletcher, a lawyer at the Fletcher Law Firm in Little Rock.
Added Jim Harris, a partner at Little Rock’s Friday, Eldredge & Clark: “We want to make sure the change in the law doesn’t produce an unintended consequence.”
Front Section, Pages 1 on 01/01/2010