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Estate Tax Can — but doesn’t have to — Hurt Middle Class

By July 29, 2015November 1st, 2017Published Articles

By Kelly Ann Scott

The claim

Politics met taxes this week in the race between Republican Sharron Angle and Democratic U.S. Senate Majority Leader Harry Reid.

At issue are the taxes paid on estates when people die, something known as the estate tax, inheritance tax, or, if you are a critic, the “death tax.”

This week, Angle went to a small business in Sparks and signed a pledge saying that if she is elected in November to the U.S. Senate then she would work to abolish the tax.

The contention (really which came from the American Family Business Institute and Angle by her signing the pledge) is that the inheritance tax hurts families, small businesses and farmers.

The background

Financial experts say some sort of tax on estates has been around almost since the United States became a country. The taxes have been used to fund wars and other national events, according to newspaper accounts. And, they also helped prevent aristocracies from forming in America, experts say.

But the glitch of the law that has prompted the cries for abolishment came just this year — It’s a political problem.

In 2001, President George W. Bush lowered the estate tax from 55 percent to 45 percent and raised the amount you can pass on tax-free from $1 million to $3.5 million. The glitch is that the change was set to expire in 2009. Lawmakers never managed to agree on a new tax law, so the entire thing expired then. If you die this year and you’re rich, there’s no estate tax for 2010.

But, the estate tax does start again in 2011 — going back to the pre-Bush administration changes. That means the $1 million starting point and 55 percent tax rate — unless Congress does something.

The Obama administration has proposed returning the estate tax to its 2009 level, with a $3.5 million exemption and a 45 percent rate on assets that exceed that amount. The House approved the administration’s proposal last year, but Republican opponents blocked action in the Senate, according to USA Today.

Now what exactly is this estate tax? Well, according to the IRS, it works like this (assuming the $1 million limit): You can pass on the first $1 million of your estate (money, business, etc.) without paying the tax, but then have to pay the 55 percent tax on everything over that amount.

Proponents argue the tax hits those who have the money to pay it, affects a small number of Americans and encourages charitable giving. Critics say that the tax essentially taxes people twice, hits those who put the most amount of money back into the economy and could have a crippling affect on small businesses passing between generations.

The facts of the matter are these:

In Nevada in 2008, the IRS reported that 140 households ended up paying about $714 million in estate taxes (after deductions, etc.). That’s when the tax exclusion was $2 million with the tax at 45 percent. In the entire country for that year, 17,172 people paid the estate tax, which brought in about $25 billion, according to the IRS.

The estate tax recently came back into the spotlight with the death of New York Yankees owner George Steinbrenner. He died this year — the year of no estate tax — and the federal government missed out on about $500 million in taxes, according to experts who estimated that for a Los Angeles Times article.

In some ways the debate over Steinbrenner’s estate highlights the argument for the tax. Here’s an estate unlike most of ours — it’s worth billions. In fact, there are only about 400 billionaires in the entire United States, according to Census data.

But, the tax with a starting point of $1 million could hit a lot more than the Steinbrenner’s of the world.

In fact a Spectrem Group study found that households with a net worth of $1 million or more — but not including their primary home — grew in 2009 to 7.8 million households, according to an article in the Los Angeles Times. That number grew by 16 percent from 2008.

Heidi Foster, who is a wealth adviser and investment manager with American Wealth Management, said a $1 million estate is what many people want to achieve in terms of estate planning. If you live off 5 percent of a $1 million estate, then you have about $50,000 a year — close to the average income for the average household, she said.

Steve Anderson, who is a financial consultant with RBC Wealth Management, said that generally those who have to pay the estate taxes can reduce their tax burdens through financial planning, but they can’t avoid it.

Generally, financial experts say that while everyone understands that the government needs to collect revenue, the estate tax wasn’t meant to cut into the inheritances of the middle class. With inflation and a $1 million starting point, that could happen. It’s not a stretch for a successful small business owner to have an estate worth $1 million.

Yet, at the same time, many financial experts point to the estate tax as a way of increasing charitable donations, which can help mitigate what some pay. Without it, some wonder whether as many foundations, donations and endowments would happen.

The verdict

Does the inheritance tax hurts families, small businesses and farmers?

Well, yes, it might if it kicks in at a $1 million starting point and 55 percent rate. However, with a $1.47 trillion deficit (as of Friday), it’s pretty difficult not to acknowledge that the government needs revenue. And doing nothing with that could hurt families, small business and farmers just as much. Perhaps a higher starting point and smaller percentage would affect fewer people who might be caught in the tax net — and really aren’t the people the tax intended to touch.

Heidi Foster is quoted in the following article which appeared in the Reno Gazette Journal in December 2010.