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Tuesday, August 3, 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 estate tax exemption was $3.5 million per decedent, and the maximum estate tax rate was 45%. For people who die in 2010, there currently is no estate tax. However, the gift tax, associated with the estate tax, remains 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%.

Also for 2010, while the estate tax is repealed, there is a significant change in the method used to determine the "basis" of all capital assets transferred at death—from "step-up in basis" (value at the time of the decedent's death) to "modified carryover basis." Basis is the "cost" of an asset, used to calculate the capital gains tax due when heirs sell inherited assets. Under the modified carryover basis rules for 2010, there is a step-up in basis allowance that can be added to the decedent's acquisition cost (carryover basis) to determine the heirs' basis in the assets. The cumulative value of the step-up allowance is $1.3 million per decedent, plus another $3 million for assets transferred to a surviving spouse. In effect, these allowances continue to provide stepup in basis treatment for the heirs of small estates, thereby protecting them from potential tax liability on the capital gains that accrued during the decedent's period of ownership.

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) exemption 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.

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 with modifications. Several bills would target estate tax relief on family-owned farms, small businesses, or conservation easements. 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, and the subordinate gift tax exclusion at $1 million. These exemption amounts would not be indexed for inflation. The top estate and gift tax rate would remain at 45%. An alternative proposal in the Senate, the so-called Lincoln-Kyl proposal, would permanently extend the estate tax, but with a $5 million exemption, indexed for inflation, and a maximum tax rate of 35%, both phased in over 10 years. The Senate did not act on the estate tax in 2009 but is expected to address the estate tax in 2010, during the second session of the 111th Congress. The Obama Administration's federal budget proposal for FY2011 once again proposed to permanently extend 2009 estate tax law, effective retroactively to January 1, 2010.

Both the Treasury Department and the Joint Committee on Taxation have estimated the 10-year revenue loss for FY2011-FY2020, relative to current law (with a $1 million exemption), for the President's proposal to extend 2009 estate tax law (with a $3.5 million exemption), effective retroactively to January 1, 2010. The Treasury's 10-year revenue loss estimate is $262 billion, and the JCT's is $253 billion. Neither estimate includes the interest cost associated with deficitfinancing the loss of revenue.

Date of Report: July 16, 2010
Number of Pages: 47
Order Number: R40964
Price: $29.95

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