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Thursday, January 21, 2010

Estate Tax Legislation in the 111th Congress

Nonna A. Noto
Specialist in Public Finance

The federal government levies an estate tax on the net value of assets transferred to individuals (other than the surviving spouse) upon a person's death. Under provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16), for people who died in 2009, the applicable exclusion amount (exemption) under the estate tax was $3.5 million per decedent, and the maximum estate tax rate was 45%. For people who die in 2010, there is no estate tax. However, the gift tax, associated with the estate tax, is scheduled to remain in place in 2010, with a cumulative lifetime exclusion of $1 million (above and beyond the annual gift exclusion of $13,000 per donor per recipient) and a maximum tax rate of 35%. In addition, when the estate tax is repealed in 2010, there is scheduled to be a significant change in the method used to determine the "basis" of all capital assets transferred at death—from "step-up in basis" to "modified carryover basis." 

The estate tax provisions of EGTRRA are scheduled to sunset at the end of 2010. If Congress does not change the law beforehand, on January 1, 2011, estate and gift tax law will return to what it would have been had EGTRRA never been enacted. The unified estate and gift tax would be reinstated with a unified (combined) exclusion of $1 million. The maximum tax rate would rise back to 55%, plus a 5% surtax on taxable estate value from $10.0 million to $17.184 million. 

The Obama Administration's federal budget proposal for FY2010 proposed to permanently extend 2009 estate tax law, and the extension was not classified as a tax cut. The concurrent budget resolution that Congress adopted for FY2010 (S.Con.Res. 13) on April 29, 2009, provided budget room for the permanent extension of 2009 estate tax law. H.R. 2920, the Statutory Pay-As- You-Go Act of 2009, as passed by the House on July 22, 2009, states explicitly that the extension of 2009 estate tax law is not an item that would need to be paid for under the statutory pay-go rules being proposed in the bill. 

Numerous bills were introduced in the first session of the 111th Congress either to permanently repeal the estate tax, or to retain the estate tax but modify it. The three most frequently mentioned proposals for extending the estate tax were a one-year extension of 2009 law; a permanent extension of 2009 law; and a permanent extension of the estate tax, but with a $5 million exemption and a maximum tax rate of 35%. 

On December 3, 2009, the House passed H.R. 4154 by a vote of 225-200. Division A of H.R. 4154 is the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009. It would permanently extend 2009 estate tax law effective January 1, 2010. The estate tax exemption would remain at $3.5 million per decedent; the exemption amount would not be indexed for inflation. The top estate tax rate would remain at 45%. Division B of H.R. 4154 is the Statutory Pay-As-You-Go Act of 2009 that was previously adopted by the House on July 22, 2009, as H.R. 2920. On December 16, 2009, the Senate decided not to act on the estate tax in 2009. The Senate is expected to address the estate tax in 2010, during the second session of the 111th Congress. 

In December 2009, the Joint Committee on Taxation estimated the 10-year revenue loss from extending 2009 estate tax law, relative to current law, at $234 billion for FY2010-FY2019. This estimate does not include any interest cost associated with deficit-financing the loss of revenue. In March 2009, Treasury estimated estate and gift tax revenue under the proposal to be $266 billion over the same 10-year-period. This report will be updated as legislative events warrant.

Date of Report: January 5, 2010
Number of Pages: 37
Order Number: R40964
Price: $29.95

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