Senate Tax Bill Introduced: Impact on Estate Taxes and Revenues

December 10, 2010
300px Harry Reid official portrait Senate Tax Bill Introduced: Impact on Estate Taxes and Revenues

Senate Majority Leader Harry Reid. Image via Wikipedia.

Yesterday, Senate Majority Leader Harry Reid introduced the first Congressional bill that reflects the Obama-Republican compromises on estate taxes from earlier this week.

Hani Sarji at forbes.com has closely monitored the estate tax debate all week and provided an excellent summary of Reid’s bill early this morning.  Here, I summarize his summary by briefly explaining the bill’s most notable provisions, as well as a perspective on its potential revenue impact, based on a preliminary report released by the Bureau of National Affairs yesterday.

Estate Taxes Retroactive to January 1, 2010

Interestingly, the bill makes the $5 million exemption and maximum 35% rate retroactive to the beginning of 2010 (not 2011).

Does this raise “ex post facto” concerns (i.e. creation of a law that makes a prior legal act illegal – such laws are unconstitutional)?  Probably not, for two main reasons.  First, the U.S. Supreme Court held in United States v. Carlton, 512 U.S. 26 (1994) that retroactive tax laws are not unconstitutional if applied legitimately and not arbitrarily for a modest period of retroactivity.  Second, the Reid bill enables representatives of 2010 decedents to choose between 2010 (no estate tax but limited carryover basis) and 2011 law (estate tax with unlimited carryover basis).  In other words, families can still opt to use the existing law if it is in their favor to do so.

Step Up in Basis

As referenced above, the Reid bill eliminates the limited carryover basis provisions established for 2010, and an unlimited step-up in basis will be permitted in 2011 and 2012 estates.

Estate and Gift Taxes Reunified

For 2011 and 2012, estate and gift tax rates will now be identical, as they were prior to 2001.  A gift given during one’s lifetime, as well as one given from the estate will both have $5 million exemptions ($10 million per couple) at the exact same graduated rates, maxing out at 35%.

Portability

The Reid bill will allow a surviving spouse’s estate to utilize any unused exemption from the decedent spouse’s estate.  This would apply to the estates of people dying after December 31, 2010.

A Perspective on Lost Revenues

Highly-regarded Tennessee attorney Bryan Howard posted on his blog the Bureau of National Affairs’ (BNA’s) preliminary estimates of the revenue impact of Senator Reid’s bill.  The estimates include a total loss of $340 billion in 2011 and $401 billion in 2012.  However, you may be surprised by the impact of the Estate and Gift Tax proposal.

The following chart lists the estimates in six main categories contained on the BNA chart, and also includes the costs of retaining the current income and capital gains rates for the next two years.

Preliminary BNA Estimates of Tax Hike Prevention Bill

Amounts listed are estimated tax revenue losses, rounded to nearest billions of dollars.
20112012
Temporary Extension of Tax Relief
--Retain 10% Bracket
3145
--Retain 25% & 28% Brackets
1318
--Retain 33% & 35% Brackets
2031
--Capital Gains Tax, max 15%
10-2
--Tax on Dividends, max 15%
514
--Other
2081
Total Tax Relief Extensions99187
AMT Relief8668
Estate & Gift Tax Relief
528
Extension of Investment Incentives
5558
Temporary Payroll Tax Holiday
6744
Temporary Extension of Certain Expiring Provisions
2816
NET TOTAL
340401

As shown above, the estate and gift tax effects constitute less than 4.5% of the overall revenue loss over the next two years, including less than 1.4% in 2011.

Additionally, here are some other interesting numbers.  According to this summary of the 2011 Fiscal Year Budget proposal issued by the U.S. Office of Management and Budget last February, the estimated outlays for the U.S. government were $3.83 trillion against receipts of $2.56 trillion, resulting in an estimated $1.26 trillion budget deficit.

Of the receipts, estate and gift taxes were estimated at $25 billion, or less than 1% of the overall anticipated revenues. In other words, over 99% of our government’s revenues come from sources outside of estate and gift taxes.

As fun as it is to discuss the benefits and disadvantages of exemptions and rates, it is also interesting how much energy is spent on debating and analyzing what is and has long been a truly minuscule portion of our government’s finances.

 Senate Tax Bill Introduced: Impact on Estate Taxes and Revenues
 Senate Tax Bill Introduced: Impact on Estate Taxes and Revenues

Scott

Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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3 Responses to Senate Tax Bill Introduced: Impact on Estate Taxes and Revenues

  1. December 10, 2010 at 6:27 pm

    It seems like there are a lot of changes coming up in the law, thanks for the chart really helped break it down.

    • Scott
      December 11, 2010 at 12:35 am

      Chris–

      It certainly is an interesting time. We have been waiting almost 10 years for the next phase of estate taxes, and the decision has merely been deferred for another two.

      Thank you for checking in!

      Scott

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