Wednesday, Oct. 14
Posted: 8 a.m.
The estate tax, usually referred to as the "death tax" by its opponents, is on track to be repealed come Jan. 1, 2010.
Yeah, right. Technically, that's on the horizon. But don't count on that happening.
Although the estate tax applies to only a tiny group of taxpayers, there's still money to be made from its collection. Given the ginormous deficits we face, don't expect Capitol Hill to give up potentially easy money.
But one thing you might see is some changes to the system.
The recent focus on the impending end of the estate tax has prompted tax experts to look at ways to tweak the system. David Cay Johnston, former Pulitzer Prize-winning tax reporter for The New York Times and now a professor at Syracuse University College of Law, says a lot of the current buzz among the trusts and estate bar is about portability.
Basically, this is the concept that would make it more likely that the surviving spouse gets to use the first-to-die spouse's estate exemption. What often happens now is that when one spouse dies without having used the exemption, it disappears and cannot be used by the surviving spouse.
"This has made estate planning difficult for a significant number of married couples who have what might be described as intermediate-level wealth," says Hofstra University law professor Mitchell Gans.
While the goal of Gans and his pro-portability colleagues is laudable, Johnston says the approaches presented so far to remedy the situation create another problem. They are too complicated.
Just what the tax code needs, more complexity. Not!
And the estate tax section of the code is even worse. If you have any doubt about its complexity, just check out Bankrate's Estate planning for everyone. While the guide provides a good map through the convoluted process, when it comes to setting up specifics for your estate, you need to hire an estate tax professional.
So Johnston argues for a KISS -- Keep It Simple, Stupid -- estate tax.
"Few things vex our tax system more than the increasing complexity that enables those who can afford the best legal and accounting talent to pay less tax while making mince-meat of basic economic and legal concepts," Johnston writes in Tax Analysts (subscription required, sorry!).
Johnston cites in his article a great example of how the estate tax system makes things more difficult: It deals with married couples in a totally different fashion than do other parts of the tax code.
"We count those who are married filing jointly as 'a taxpayer,'" writes Johnston. "But when it comes to estate tax planning, we expect people to be unified in planning, yet separate in asset ownership to take full advantage of the law.
"Instead of all that, we could just add a check-the-box feature to Form 1040. When the survivor files the tax return for the year when the spouse died, he just checks a box. It could be inserted at the top of Form 1040 on the name line without adding a line, or as a sixth category under filing status, or by modifying the qualified widower box to distinguish between first-time and ongoing status."
Johnston's suggestion makes way too much sense for it to be quickly considered by Congress. Yes, that sounds cynical, but I spent almost two decades in D.C. watching laws get made and remade, so my perspective has some basis.
But I am hopeful that when Congress does finally deal with the estate tax on a permanent basis -- my best guess is that will happen in 2010 after a one-year fix is approved by Dec. 31 -- it will look at streamlining that portion of the code.
Hey, a tax geek can dream, can't she?!