Unusually large amount of tax news coming out of Washington today and much of it deals with President Obama's proposed tax policy changes.
In short, your taxes are going to rise - dramatically - if Congress allows the president's recommendations to become law. This new Congress represents a Republican majority, making such substantive changes unlikely, but here is more information about the issue.
The President has proposed increasing what some people refer to as "death taxes," representing a fundamental change in tax policy that would limit what many Americans can leave to their heirs. The change would affect nearly everyone who has aging living parents, and are likely inherit a house, farm, property, items, etc. that might have value.
The administration is attempting to target the wealthy in making these recommendations but much of the affect of this new policy would hit America's middle class as well - people who aren’t wealthy enough to pay estate taxes, if their inherited assets have gained sharply enough in value.
Such taxes likely explain "the death of the family farm" and the rise of vast corporately owned farms.
Death Taxes - or inheritance taxes - are taxes imposed by the federal and/or state government on an estate after someone's death. These taxes are levied on the beneficiary that receives the property in the decedent's will; the tax amount is based on the property's value at the time of the owner's death relative to its value when accumulated or purchased.
Taxes which apply to estates or to inheritance in the United States trace back to the 18th century. According to the IRS, a temporary stamp tax in 1797 applied a tax of varying size depending on the size of the bequest, ranging from 25 cents for a bequest between $50–$100, to 1 dollar for each $500. The tax was repealed in 1802. In the 19th century, the Revenue Act of 1862 and the War Revenue Act of 1898 also imposed rates, but were each repealed shortly thereafter. The modern estate tax was enacted in 1916.
Estate taxes were temporarily phased out and repealed by tax legislation in 2001. This legislation gradually dropped the rates until they were eliminated in 2010. However, the law did not make these changes permanent and the estate tax returned in 2011. The 2010 legislation had a sunset clause so that in 2013 the estate tax would return to its 2001 level. But then on New Year's Day 2013, Congress made permanent an estate tax on estates in excess of $5 million at a rate of 40 percent.
In cases involving the inheritance of a home, under the proposed Obama plan, there would be a $200,000 exemption plus a $500,000 home exemption. An example cited was a $1 million home originally purchased for $250,000. In this case, $500,000 of the gain would be exempt and a federal tax of $70,000 would be owed on the remaining $250,000 appreciation.
The fairness of any form of estate tax is hotly debated and its status has been exhibited in recent years by the wide variation in policies, from the extended phase-out under President George W. Bush's administration, and its corresponding sunset clause, followed by continuing adjustments to the rates and exemptions under the presidency of Barack Obama. Generally the debate breaks down between a side which opposes any tax on inheritance, and another which considers the tax legitimate and necessary, with little dialogue about where a reasonable rate would be set.
Proponents of the estate tax argue that it is a rational point of taxation, with major benefits compared to other types of taxes such as income taxes, business taxes and sales taxes. By the same token, to tax earned income but not inheritance is seen to promote classism.
Today, death taxes have become a contentious social issue. Supporters consider this form of taxation as a way to level the playing field. In the 2006 documentary, The One Percent, Robert Reich commented, "If we continue to reduce the estate tax on the schedule we now have, it means that we are going to have the children of the wealthiest people in this country owning more and more of the assets of this country, and their children as well.... It's unfair; it's unjust; it's absurd."
"A group of wealthy businessmen petitioned Congress last week for a more progressive estate tax," Betsi Fores wrote. A letter signed by billionaires Warren Buffet and George Soros, says,“We believe it is right to have a significant tax on large estates when they are passed on to the next generation."
In arguing against the U.S. federal estate tax, the Investor's Business Daily has editorialized that "People should not be punished because they work hard, become successful and want to pass on the fruits of their labor, or even their ancestors' labor, to their children. As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day."
According to Phil Kerpen, writing in the Daily Caller, "there is no more vivid or offensive example of the 'you didn’t build that' philosophy on the books than the federal death tax, which supposes that when you die a hefty portion of everything you built up over a lifetime ought to go to government. It’s a vestige of the feudal days when all property was owned by the king.
"That’s probably why the death tax is the 'worst tax — that is, the least fair,' according to polling by the Tax Foundation. And it’s also why our founders thought the idea of seizing an estate at death so outrageous that they prohibited it as a penalty for treason in the U.S. Constitution (Article III, Section 3). And yet now, seizing more than half of it as a penalty for accomplishing the American dream is the preferred policy of Democrats in the United States Senate."
Some free market critics of the estate tax contend that proponents assume the superiority of socialist/collectivist economic models. Under this view, proponents of the tax commonly argue that "excess wealth" should be taxed without offering a definition of what "excess wealth" could possibly mean and why it would be undesirable if procured through legal efforts. Such statements are seen to exhibit a predilection for collectivist principles that opponents of the estate tax oppose.
Many countries have inheritance tax rates at or near zero. The disparity between rates has encouraged some wealthy individuals to relocate to avoid or minimize taxation moves thus moving the wealth – and all associated future tax revenue – outside the United States. As a result of transferring wealth abroad, the 'estimated' tax generation claimed by proponents of the estate tax will likely be far less than that claimed and will likely lower the future tax base within the United States.
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