Taxed to death and after death
Americans for Tax Reform sent out a recent communication stating that beginning in January 2011, the largest tax hikes in the history of America will take effect. One section of their release explained the changes to estate taxes, better known as the “death tax.”
Upon reading this section, I remembered quite a few media outlets discussing Yankee owner George Steinbrenner’s passing in July. A few sources even went so far as to say that 2010 was a good year for him (and others) to die because there are no estate taxes this year. This rate will increase to 55 percent on January 1, 2011, on estates over $1 million, unless Congress takes action before then.
On July 14, Sens. Blanche Lincoln (D., Arkansas) and Jon Kyl (R., Arizona) introduced a proposal to permanently reform the federal estate tax. The proposal would require the Senate Finance Committee to amend H.R. 5297, the Small Business Lending Fund Act of 2010, to permanently set the estate tax rate at 35 percent, with a $5 million exemption amount phased in over 10 years and indexed for inflation.
While the Lincoln-Kyl amendment doesn’t solve all of the problems with the estate tax and its double taxation on heirs, it is a step in the right direction.
If the estate exemption limit isn’t raised, many small businesses which are being passed from one family member to another, will suffer. There is a very significant and real possibility that some small businesses will owe more in taxes than they are able to afford. This not only has a detrimental effect on the family and those involved with and working for their business, but also impacts the local economy where these companies are located.
One million dollars adds up very quickly when you have to include family-owned farms and small businesses, primary residences and second homes, IRAs and 401(k) balances, stocks and bonds held in taxable brokerage accounts, jewelry, artwork, family heirlooms, and other personal possessions.
Consider the example of a small construction company. The company is a sole proprietorship, and the owner wishes to pass the assets on to his heirs. The company and its assets are valued at $1 million.
In addition to the company, the owner has a home valued at $500,000 and $500,000 in various investments and savings accounts. If the owner dies on January 1, 2011, and no changes are made to the estate tax laws, the heirs will owe $1.1 million in taxes.
Does this seem like a lot?
It is, especially considering that some of the deceased owner’s assets can’t easily be liquidated. The question then becomes whether the heirs, most likely family members, would be forced to sell the business that their loved one worked so hard to build. If the business shuts down, there is also a loss of jobs in the community. Good options are very limited, and all of this occurs while the heirs are still grieving.
If the Lincoln-Kyl amendment passes, the taxes would be decreased to zero in the previous example because the deceased’s assets were less than $5 million. Keep in mind that this money isn’t tax free because income taxes and property taxes were collected on the earnings the first time. By eliminating the estate taxes on this amount of money, the company most likely remains solvent and can continue operating business as usual.
Numerous public opinion polls have shown that the death tax is highly unpopular with Americans. Those who understand the tax realize that this is a clear example of double taxation. If the heirs sell some of the assets, such as stocks, they will also be subject to a third layer of taxation in the form of capital gains.
Losing a loved one is hard enough without the IRS being involved. Let’s hope that Congress eventually eliminates the estate tax once and for all.