Last night, my 82-year old dad gave me an article from the Wall Street Journal. The article addressed how families may pay more in tax if the estate tax is eliminated. It caused me to take a closer look at our two different tax structures.
Let's say, for example, that Dad dies in 2010 with an estate of $3,500,000. His capital gains basis in these assets prior to his death was $500,000.
Under our current law, the family will pay no estate tax. The family will elect to use the $1.3 million step-up so that the total basis is $1.8 million. When they sell the assets for $3.5 million, they will pay approximately $340,000 in capital gains tax ($1.7 million appreciation * 20% federal and state capital gains tax).
If Congress brings the estate tax back with a $3.5 million exemption (and the corresponding step-up in basis), the family will have a total tax bill of $0. No federal estate tax because the estate did not exceed $3.5 million. No capital gains tax because of the step-up in basis at Dad's death to $3.5 million.
No estate tax: family pays $340,000. Estate tax: family pays nothing.
So perhaps if Congress wants to "tax the wealthy," it should permanently eliminate the estate tax???
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