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Podcast: Next Steps on the Estate Tax

In this podcast, we will discuss upcoming Congressional action on the estate tax. I’m Michelle Bazie and I’m joined by Chuck Marr, the Center’s Director of Federal Tax Policy.

1. Chuck, let’s begin with a quick review of what the estate tax is.

Michelle, the estate tax has been a long standing part of the tax system. It is a tax on property – like cash, real estate, stock, or other assets – that is transferred from deceased persons to their heirs. It doesn’t apply to everyone, though. In fact, relatively few wealthy people faced the estate tax in recent years.

The estate tax is levied on the portion of the value of an estate that exceeds a specified amount of money, what is called the exemption level.

2. What is that amount?

In 2009, the tax-free exemption level was $3.5 million for an individual and $7 million for a couple. This means, for example, an heir of an estate worth $4 million would owe taxes on at most $500,000.

Estates worth less than that amount owed no estate tax. Because the exemption levels were so generous, only the wealthiest one out of every 400 estates paid any estate tax under the 2009 rules.

3. So, what is the tax rate that these estates pay above the exemption level?

The rate in 2009 was 45 percent. However, after taking into account the tax-free exemption and other deductions, the wealthy heirs who pay the tax actually end up paying it at a rate of about 20 cents on the dollar.

It is also important to keep in mind that much of this inherited wealth has never been taxed before because it is in the form of capital gains. While it is not widely known, the tax burden on capital gains that exist when a person dies are completely forgiven.

4. Chuck, what’s the exemption level now?

Well, let me step back. In 2001, Congress passed legislation that essentially weakened the estate tax over time. They gradually raised the exemption level to what we saw in 2009: $3.5 million per person. The 2001 legislation culminated in a complete repeal of the tax in 2010, which meant that as of January 1st of this year, the tax disappeared altogether. No estate – no matter how large – is subject to the tax this year. But as we all toast the New Year in a few months, the estate tax will return, but not at the 2009 levels. The exemption level will drop down to what was scheduled before the 2001 legislation.

5. What are those pre-’01 levels?

A lower $1 million per-person tax-free exemption.

6. Should policymakers do anything to intervene?

In the upcoming debate about what to do with the estate tax, some people will want to get rid of it completely. That would be a major mistake and it would only benefit the wealthiest estates in the country. Our country is facing very large budget deficits. If we repeal the estate tax, deficits and debt will go up even more, pressure will grow to cut health care, education, and other key programs that people rely on. Sacrificing these priorities in order to give a tax cut to people who already are extremely wealthy is not a wise trade-off.

Bottom line: We need a robust estate tax, and at a minimum we should keep the law as it was in 2009, which essentially exempted more than 99% of estates, so that more than 99% of estates will be passed on completely tax-free.

Thanks for joining me, Chuck.