Many people do not understand the hidden major taxes that many heirs may have to pay starting next year when the estate tax is scheduled to disappear., although it is set to return the following year at the high tax rate and low estate tax exemption that existed prior to 2001. Back in 2001, Congress passed a strange piece of legislation, signed by President Bush, concerning the estate tax. The bill provided that the estate tax would essentially be cut over the span of the decade - the exclusion would go up and the taxable rate down - through the end of 2009. The top estate tax rate for 2009 is currently 45% with a $3.5 million exemption. In 2010, the federal estate tax would disappear entirely, and in 2011, the tax would return to the Clinton-era rate of 55 percent, with only a $1 million exclusion.
The gift tax, however, was not repealed. The gift tax exemption, the amount that can be gifted away tax free during the donor's lifetime, was set at $1 million in 2002 and will remain at that level indefinitely.
The problem for 2010, however, is that although there will be no state tax in 2010, heirs also lose the step up in basis provisions where heirs take on a new tax basis for their inherited property equal to the value of the property at the time of death. Therefore, if they sell property immediately after inheriting it, they would owe no capital gains tax. Without an estate tax, however, there would be no step up in basis, and heirs would be saddled with the very low cost basis that the decedent had in the property. This could therefore generate significant capital gains tax for those people disposing of property inherited in 2010, where under current legislation, they would have paid no estate tax and no capital gains tax on gains in value through the date of death if the estate was below the exemption level.
So far, the Senate has failed to act to create a long term adjustment to the estate tax. Many people believe that Congress will act sometime early next year and make any changes to the estate tax retroactive to the beginning of 2010, and although most believe that this is constitutional and has Supreme Court precedent to do so, there will probably be significant litigation and uncertainty for quite a while.
**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**
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