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Dear Tax Talk,
What is the state of the estate tax in the next few years?
Contrary to rumors, the estate tax is not dead. In fact the near dead need to be careful about timing as the death tax beats irregularly for the next three years.
If you’re unfortunate enough to die in 2009, you’ll enjoy the largest estate tax exemption that has ever existed: $3.5 million. This means that assets up to $3.5 million in value will pass tax-free to your heirs. The maximum tax rate is 45 percent and applies to anything over the exemption (i.e., no more graduated tax rates).
All inherited assets will continue to have their basis for determining future gain or loss stepped up to fair market value at date of death.
Things also are looking up, tax-wise, if you die in 2010. If current reform doesn’t pass, there will be no estate tax but only limited step-up. The step-up will only apply to $1.3 million in assets passing to the heirs. The remaining assets will have a carry-over basis from the decedent.
Although it may be difficult to determine the decedent’s basis in certain long-held assets, even if you assume a zero basis, a 15 percent capital gains tax rate is a whole lot easier to live with (sort of) than a 45 percent tax rate.
In 2011, you’ll be beamed back to the 2001 tax rules, with an exemption adjusted for inflation of $1 million. The maximum tax rate also soars back to 55 percent. Carry-over basis applies to all assets.
States that are already hemorrhaging from the real estate crisis are scrambling to set up their own rules. Many states just piggybacked the federal rules and picked up a part of the overall estate tax known as the state death tax credit. With a diminishing federal estate tax, many states are decoupling and passing their own estate or inheritance tax rules.
The rules are also different for gift taxes, nonresident aliens and binational married couples. All these difficulties coupled with the uncertainty of death make planning an intricate process.
The Obama budget for 2010 did not address the estate tax for 2010. Congress will have to enact a law to change the one-year absence of the estate tax in 2010, and that has yet to be done. You can review Bankrate’s estate tax calculator to see how the estate tax affects you in 2009.
Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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