Should federal estate tax law be reformed? I believe so, yes. Should any advocate of reform give retirees inaccurate information about the effects of the estate tax? Absolutely not.
My mother-in-law, Rose, received a mailing from an organization that's trying to change US tax law. With lots of italics and exclamation points, the letter screams that her family could be hit with a 55% tax bill.
I found this letter—and its passionate request for a donation—to be nothing short of a shamelessly disingenuous attempt to raise money from retired working-class seniors so the richest Americans won't have to pay estate taxes. It's not that I oppose reform of the federal estate tax—I support it. I believe that estates of less than $5,000,000 should be exempt. But some of those lobbying for a complete repeal seem to me to be using deceptive tactics.
To understand why I say this, first let me tell you about what I read in the solicitation letter, about what the estate tax law actually says, and about Rose.
A scary letter
The letter warned her:
- that her estate tax rate is going up to 55%.
- that Democratic congressional leaders want Rose to give the IRS half of all she owns.
- that high estate taxes destroy family farms and small businesses.
What's really happening in 2011?
Permanent reductions in estate taxes had been passed by Congress under the Bill Clinton administration. Before those reforms could fully take effect, more aggressive reforms were passed in 2001 during George W. Bush's first term, when he had slight Republican majorities in both houses of Congress.
But the best Bush could get was a tax that sunsets—it expires—after he leaves office. When those reforms expire, the less-aggressive Clinton-era reforms will resume their effect.
I interpret this to mean the increase in taxes isn't the responsibility of today's 110th Congress. It's the responsibility of 2001's 107th Congress, and of President Bush, who signed the bill into law on June 7, 2001. I believe the long expiration date was a sadly-typical political attempt to make the unpopular "tax increase"—actually, just a return to the prior law—look like it was someone else's fault, to mask the political failure of being able to pass a permanent repeal.
Will it hurt?
When the Bush reforms expire, will the federal estate tax rate return to 55%? Yes, that's the maximum rate. But there's an amount that's exempt. It works just like your income tax in this respect. The vast majority of income tax filers are entitled to at least a standard deduction and personal exemption, so some portion of their actual income isn't subject to any income tax.
And for taxable estates, the first $1,000,000 is not subject to the federal estate tax. For families with more than $1,000,000 in taxable value, there are a number of estate tax reduction techniques that can reduce or eliminate their tax burden.
So who does the estate tax affect? How many estates get hit when federal estate taxes begin after $1,000,000? For 2003, the last year for which the federal estate tax had a minimum threshold of $1,000,000, the IRS (at http://www.irs.gov/taxstats/indtaxstats/article/0,,id=96442,00.html) reported 1,013 taxable estates in Ohio. For that same year, the Ohio Bureau of Vital Statistics (at http://dwhouse.odh.ohio.gov/datawarehousev2.htm) reported 108,590 total Ohio resident deaths. So less than 1% of Ohio's year 2003 decedents' estates were subject to the federal estate tax. It's actually about one out of every 107.
Looking nationwide, IRS reports that 33,302 taxable federal returns were filed for 2003. The Centers for Disease Control and Prevention report that 2,448,228 deaths occurred in the United States that same year. So about 1.36% of decedent's estates—about one out of every 73—were taxable. A more widely reported figure was that 2% of estates—one in fifty—would be taxable.
Help us out, Rose.
These are, of course, the richest 2% of Americans. But I don't see that mentioned anywhere in the letter that Rose received, with its impassioned plea for a monetary donation.
And let me tell you a little bit about my mother-in-law. Rose is a widow who gets by on a modest pension and Social Security. Her late husband was a hard-working engineer who always provided well for his family, but whose career was cut short by a chronic illness that overshadowed the last 19 years of his life. As a result, the family's opportunities to save were limited.
Rose's entire fortune is relatively modest—her taxable estate will be well under $500,000, including insurance proceeds and her home.
Rose has never had anywhere near the $1,000,000 threshold for federal estate taxes. But it was to the household of this woman that an organization sent its solicitation for funds to support a permanent repeal of a tax that won't remotely affect her—a detail mentioned nowhere in the letter.
Where have all the farmers gone?
Remember how the letter said the tax destroys family farms? This was a highly-publicized component of the 2001 estate tax reform lobby. It has been reported that despite desperate attempts, advocates of estate tax reform in April 2001 were unable to produce even a single farmer or rancher who had lost a farm to the estate tax.
Rose's late husband owned one of those farms. When he sold it, it didn't bring his fortune to anywhere near $1,000,000.
Think about it: how many people do you know who've lost their family businesses because of estate tax burdens? Most of us can't think of even one, and there's a simple reason. Even before the 2001 estate tax reform, there were protections in the law for bona fide working family businesses.
What you might not have known.
When I talk to groups about estate taxes, they're amazed that the federal estate tax probably doesn't apply to them.
- They're amazed that an unlimited amount can pass from one US citizen spouse to another without any federal estate taxation.
- They're amazed that the trumpeted "repeal" of the federal estate tax lasts for only one year.
- They're amazed that on January 1, 2011, the estate tax comes back with a threshold of just $1,000,000.
For years, the income tax code has said that if you inherit property that's gone up in value (like stock or real estate), when you sell it you don't pay as much as the deceased owner would have paid in capital gains tax. This is called date-of-death step-up in basis, and it means that those who sell inherited property don't have to try to figure out what great-granddad paid for his AT&T stock.
As of January 1, 2010, taxpayers from all income brackets will have to know how much great-granddad paid for his stock, and pay tax on the same gain that great-granddad would have.
Is it any wonder I have little patience for estate-tax repeal advocates who say, "We already got a tax break, but we want the tax eliminated," and then ask my pensioner mother-in-law to give them money so their descendants won't have to go to work?
I support estate tax reform.
Yes, federal estate taxes should be reformed. I believe the threshold for federal estate taxes should be set at somewhere between $5,000,000 and $10,000,000, and then adjust for inflation. This would reduce the estate tax burden by raising the threshold to the highest level it has ever been to date. I wouldn't even be terribly concerned if the tax rate were lowered somewhat.
But let's be honest and forthright in our advocacy. There are enough arguments in favor of estate tax reform without scaring widows into thinking their limited fortunes are going to be decimated at their death.
In my professional opinion, most families from working-class to upper-middle-class would do far better to spend their time and money on efforts to reduce their individual income tax burden, or their credit card debt.
