The Estate Tax: Is it still around?

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There have been rumors circulating ever since Bush first took office that the Estate Tax was headed for extinction. This past election year, in fact, both John Kerry and George W. Bush made the Estate Tax a huge topic of debate. Yet, for many it still unclear what changes if any have taken place. The truth is, the Estate Tax is alive and well but slowly on its way out (until 2011, that is).

What on earth is the Estate Tax anyway?

The Estate Tax (commonly called the "Death Tax" by its detractors) is simply a tax applied to a deceased person's estate. Opponents of the Estate Tax argue that individuals have already paid taxes on their property while alive, so it is unfair to tax their estate again when they die. While this argument sounds reasonable enough, in actuality it is not the deceased but the heirs of the deceased who pay taxes on the estate—in other words, they are taxed on their inheritance.

The Gradual Phase-Out of the Estate Tax

So how quickly—or slowly—is the Estate Tax being phased out? As of 2001, any estate with a value over $675,000 was taxed at a rate of up to 55%. That same year, President Bush signed a $1.35 trillion tax cut package that included a gradual phase-out of the Estate Tax. This phase-out increased the 2001 $675,000 cutoff to $1 million in 2002-03, $1.5 million in 2004-05, $2 million for 2006 through 2008, and $3.5 million in 2009. And these numbers are doubled for couples!

But that's not all. At the same time the cutoff increases, the tax rate drops. For example, the maximum Estate Tax rate declined from 55% in 2001 to 50% in 2002 and is set to roll back to 45% in 2007 through 2009. The coup de grace is a complete repeal of the Estate Tax set for 2010.

If you are one of the "lucky" estate owners who dies in 2010, your heirs have a good chance of escaping the Estate tax entirely. But there is no guarantee that this inheritance boon will continue beyond 2010. The Act also contains a "sunset" provision that brings the Estate Tax back in 2011. Only a vote from Congress will permanently repeal the Estate Tax. If Congress doesn't vote for a permanent repeal, or simply fails to vote at all, in 2011 the maximum tax rate of 55% will reappear, but the cutoff will increase to one million (see the chart below).

Year

Estate Tax Exemption

Maximum Rate

2001

$ 675,000

55%

2002

$1,000,000

50%

2003

$1,000,000

49%

2004

$1,500,000

48%

2005

$1,500,000

47%

2006

$2,000,000

46%

2007

$2,000,000

45%

2008

$2,000,000

45%

2009

$3,500,000

45%

2010

-- No in 2010 -

2011

$1,000,000

55%

A Boost for the Economy or Another Benefit for the Rich?

Advocates for permanently repealing the Estate Tax say it will boost the economy by enticing wealthy Americans to spend more. Opponents argue that such benefits to the rich will take trillions of needed dollars out of America's budget, money that could help individual states keep many of their public programs alive. To make matters even more complicated, the sunset provision in Bush's 2001 tax package is keeping the debate on the Estate Tax brewing in both the House and the Senate.

In June 2003, the House approved the $162 billion "Death Tax Repeal Permanency Act of 2003" in a vote of 264 to 163. If passed in the Senate, the bill would cancel the sunset clause in President Bush's 2001 act. And the Estate Tax would be permanently repealed. The Senate has yet to act on this bill.

The Senate has, however, drafted a similar bill entitled the "Permanent Death Tax Repeal Act of 2003." If this bill passes, it too would permanently repeal the Estate Tax. Moreover, the repeal would be accelerated from 2010 to 2005.

With three more congressional elections before 2011, the debate is sure to continue in both the House and the Senate before the sun finally sets on the Estate Tax.

See also