Eight Last Minute Tax Tips from Accounting Today

Our friends at Accounting Today offers up some great tax tips you may find to be of value. If you have any questions, contact Neikirk, Mahoney & Smith at 502-896-2999.

1. Fear Not the Extension
"Everyone is afraid of an extension," says Kyle Brownlee, CEO of Enid, Okla.-based Wymer Brownlee, part of the HD Vest network of tax-focused planning firms. "Everyone is just afraid of the IRS. They think: I am sending in my return late."

But an extension doesn't raise a red flag with the IRS, nor does it really mean clients are "late," he says -- although estimated taxes are still due April 15, even if the full return is not.

"I would much, much rather file an extension and get my ducks in a row and file later," he says, adding that an extension can be for a month or up to six months. "An extension is just no big deal and nothing to be afraid of."

2. Let Entrepreneurs Wait on Funding SEP Plans
Small business owners and sole proprietors can wait until Oct. 15 to fully fund their simplified employee pension (or SEP) retirement plans -- which allow them to contribute up to 25% of the income on which they pay Social Security tax.

Many people pay their taxes on April 15 and fail to fund their SEP retirement plans because they don't have the money to pay taxes and fund their plan all at the same time, says Heather Locus, with Balasa Dinverno Foltz in Itasca, Ill.

For that very reason, the IRS allows clients to wait until Oct. 15 to fund their SEP plans if they file for an extension. "That is something people don't necessarily realize that one can actually do," Locus says.

3. Accelerate Deductions for 2014
Many deductions may expire in the 2015 tax year, including deductions for manufacturing and other business equipment -- a category that includes vehicles of 6,000 pounds in weight, allowing many Land Rovers, GMC Yukons and Toyota Highlanders, Brownlee says.

These deductions, from Section 179 in the Tax Code, remain in place for the 2014 tax year -- but no one knows if they will be extended or significantly reduced for 2015, Brownlee says. He recommends that high-net-worth business owners in particular accelerate all the deductions they can under this code for the 2014 tax year, rather than take them in increments of one-fifth per year over the next five years and risk the expiration, he says.

"You can elect up to $500,000 to expense on that equipment in 2014," he says.

The deduction pertains specifically to portable equipment; in addition to jumbo SUVs, the category includes tractors, heavy vehicles, computers, servers, desks and office equipment. Even heavy manufacturing equipment that may be bolted down, but can be shifted elsewhere in an assembly or manufacturing plan reorganization would qualify, he says.

"Think about it like this," Brownlee says. "It's for any type of non-permanent equipment. If I can pick it up and move it or if I can drive it or ride it or if it's not fixed."

4. Put Alimony in an IRA
Alimony is considered "earned income" -- which is taxable compensation and, as a result, qualifies for saving in an IRAs, Locus says. That could help some recipients who are retired or otherwise not working, Locus says.

"To make an IRA contribution, you have to have earned income, so even if you have a $5 million portfolio and you have $100,000 in dividends, that doesn't qualify," she explains. "But getting paid alimony qualifies."

"A lot of CPAs don't think about that," she adds. "A lot of people who've gotten divorced don't think about that."

5. Make Up for Lost Time
Remember that even seemingly well-off clients may need last-minute retirement help, cautions Paul Auslander, director of financial planning at ProVise Management Group in Clearwater, Fla.

"There are those heart-wrenching meetings when you have someone where you think they are doing fine and they are not," he says, citing one example.

"There was a well-known M.D. in town who for whatever reason had her world kind of blow up, and she had to pay most of her money to a spouse in a divorce," Auslander recalls. "He thought he was going to be a novelist, yet never wrote a book. Now she's 58 years old and she has to scramble.

"She's paid for all the kids' education because she was the breadwinner," he adds. "Now she's panicking and worried about her own security. I've seen [similar] cases, male and female."

Doctors and lawyers—especially trial lawyers, Auslander says -- can find themselves in this predicament as they near retirement. The answer is to get them to make catch-up contributions to their traditional or Roth retirement plans.

Some clients can also open up a SEP right before they file their tax return, he says.

"They can deposit 25% of their income -- up to $52,000 for 2014 -- and $53,000 for the 2015 tax year. It's an opportunity to make up lost ground," he says. "That's an old strategy, but ... it keeps coming back and is valuable."

6. Take State Deductions on Lease Income
Clients who receive lease income from oil and gas producing companies -- who lease the right to drill for oil on their land -- are profiting now, Brownlee says. Although oil producers are sitting on their heels, waiting for the price of oil to rebound, they are still paying pricey three-year leases to property owners for the right to drill eventually.

Lease holders must file a state tax return wherever they derive this income from, Brownlee says -- as long as that state has an income tax -- but some states also offer a deduction on that income.

Brownlee cites an example. "A client had a $400,000 lease bonus check" from Oklahoma this year, he says, and that state's 22% deduction gave her an $88,000 deduction against Oklahoma income, saving her roughly $4,400 on her state tax return. Out-of-state CPAs and planners might miss that, he notes.

7. Switch Deductions among Divorced Couples
This tactic might require ex-spouses to work together amicably, but there's a worthwhile payoff, Locus says.

Because the IRS is phasing out certain deductions for high earners who bring in $254,000 or more annually, she explains, formerly married couples may want to switch some deductions from the high-earning parent to the lower-earning one to reduce the total amount paid to the feds.

"Usually the person [in a divorced couple] who has the higher income takes the kids as a deduction exemption," she says, to get the biggest bang for the buck. However, "in 2013, a phase-out for itemized deductions and personal exemptions for high earners began again -- and now people who have an adjusted gross income of $376,000 for a single person or $402,125 for a head of a household don't get any benefit from it. So, it may make sense that the person in the higher tax bracket lets the other spouse take the deduction and the [co-parents] either split the tax benefit or put that money in a 529 college account for a kid."

Failing to swap these deductions means that, she says, "the IRS is just getting more money."

8. Remind Clients to Max Out 401(k)s
Occasionally, Auslander takes on new clients whose former advisors convinced them that they would do better by not investing as much in their 401(k)s. However, those advisors' aims in giving that advice was entirely self-serving: to keep more assets to manage for themselves, he says.

In reality, clients are always better off putting the maximum amounts into their company's retirement plans, he says.

"The math is so compelling that you'd have to be an absolute fool not to," Auslander says.

Last Minute Input from IRS

Your friends at the Internal Revenue Service today want to threaten remind taxpayers that quick and easy solutions are available if you can’t file your returns or pay your taxes on time, and you can even ask for an extension, make a payment or request payment options online at IRS.gov.

Most taxpayers have already filed their 2014 returns. Figures released today show that as of April 3, the IRS had already received just over 99 million returns and issued more than 77 million refunds averaging over $2,800.

For those who have yet to file, the IRS says don’t panic. Tax-filing extensions are available to taxpayers who need more time to finish their returns. Remember, this is an extension of time to file; not an extension of time to pay. However, taxpayers who are having trouble paying what they owe may qualify for payment plans and other relief.

- WARNING - this is tedious reading. If you'd like to discuss tax issues with a real person and a tax professional, contact Neikirk, Mahoney & Smith PLLC at (502) 896-2999. Or if you have nothing better to do, then continue -

Either way, taxpayers will avoid stiff penalties if they file either a regular income tax return or a request for a tax-filing extension by this year’s April 15 deadline. While taxpayers should pay as much as they can to minimize any penalties and interest, they should always file even if they can’t pay the full amount due. Here are further details on the options available.

More Time to File
People who haven’t finished filling out their return can get an automatic six-month extension. The fastest and easiest way to get the extra time is through the Free File link on IRS.gov. In a matter of minutes, anyone, regardless of income, can use this free service to electronically request an automatic tax-filing extension on Form 4868.

Filing this form gives taxpayers until Oct. 15 to file a return. To get the extension, taxpayers must estimate their tax liability on this form and should also pay any amount due.

By properly filing this form, a taxpayer will avoid the late-filing penalty, normally five percent per month based on the unpaid balance that applies to returns filed after the deadline. In addition, any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 15. The interest rate is currently three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.

Besides Free File, taxpayers can choose to request an extension through a paid tax preparer, using tax-preparation software or by filing a paper Form 4868, available on IRS.gov. Of the nearly13 million extension forms received by the IRS last year, almost 8 million were filed electronically.

Those who owe taxes and need a tax-filing extension can get a two-for-one deal. Use IRS Direct Pay or one of the other electronic payment options to pay by April 15 the estimated amount of tax owed, designate the payment as an extension payment, and the IRS will count that as a validly-requested extension – no need to separately file a Form 4868.

Some taxpayers get more time to file without having to ask for it. These include:

Taxpayers abroad. U.S. citizens and resident aliens who live and work abroad, as well as members of the military on duty outside the U.S., have until June 15 to file. Tax payments are still due April 15.
Members of the military and others serving in Afghanistan or other combat zone localities. Typically, taxpayers can wait until at least 180 days after they leave the combat zone to file returns and pay any taxes due. For details, see Extensions of Deadlines in Publication 3, Armed Forces’ Tax Guide.

People affected by certain recent natural disasters.

Easy Ways to E-Pay
Taxpayers who owe taxes can now choose among several quick and easy e-pay options, including the newest and easiest, IRS Direct Pay. Again, making a payment through one of these electronic options and designating it as an extension payment counts as filing for an extension. Available options include:

• Direct Pay. Available at IRS.gov/directpay, this free online tool allows individuals to securely pay their income tax directly from checking or savings accounts without any fees or pre-registration. No need to write a check, buy a stamp or find a mailbox. Payments can even be scheduled up to 30 days in advance, and the tool is available round the clock. Any taxpayer who uses the tool receives instant confirmation that their payment was submitted. More than 3.5 million tax payments totaling more than $7.2 billion have been received from individual taxpayers since Direct Pay debuted during last year’s tax-filing season.
• Electronic Federal Tax Payment System. This free service gives taxpayers a safe and convenient way to pay individual and business taxes online or by phone. Pre-registration is required. To enroll or for more information, visit EFTPS.gov or call 800-316-6541.
• Electronic funds withdrawal. E-file and e-pay from a checking or savings account in a single step.
• Credit or debit card. Both paper and electronic filers can pay their taxes online or by phone through any of several authorized credit and debit card processors. Though the IRS does not charge a fee for this service, the card processors do. For taxpayers who itemize their deductions, these convenience fees can be claimed on Schedule A Line 23.

Taxpayers who choose to pay by check or money order should make the payment out to the “United States Treasury.” Write “2014 Form 1040,” name, address, daytime phone number and Social Security number on the front of the check or money order. To help ensure that the payment is credited promptly, also enclose a Form 1040-V payment voucher.

More Time to Pay
Taxpayers who have finished their returns should file by the regular April 15 deadline, even if they can’t pay the full amount due. In many cases, those struggling with unpaid taxes qualify for one of several relief programs, including the following:

Most people can set up a payment agreement with the IRS online in a matter of minutes. Those who owe $50,000 or less in combined tax, penalties and interest can use the Online Payment Agreement to set up a monthly payment agreement for up to 72 months. Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS. With the Online Payment Agreement, no paperwork is required, there is no need to call, write or visit the IRS and qualified taxpayers can avoid the filing of a Notice of Federal Tax Lien if one was not previously filed. Alternatively, taxpayers can request a payment agreement by filing Form 9465. This form can be downloaded from IRS.gov and mailed along with a tax return, bill or notice.
Some struggling taxpayers may qualify for anOffer in Compromise. This is an agreement with the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay. To help determine eligibility, individuals can use theOffer in Compromise Pre-Qualifier, a free online tool available on IRS.gov.
Details on all filing and payment options are on IRS.gov.

Yes, Virginia, it IS taking longer to do your taxes this year:-)

Tax season is supposed to be over on April 15. But among certain groups—especially the wealthy—filing for an extension until Oct. 15 is now routine, according to Bloomberg Business and Neikirk, Mahoney & Smith CPAs.

In 2011, 11 million taxpayers filed for an extension; two years later, 13 million did, an increase of almost 20 percent. At the end of September 2014, more than 25 percent of those who had filed for an extension were still working on their filings. We're not just procrastinators. It has gotten harder to file on time. Here’s why:

1. You don't have the forms you need.

The more complicated your investments, the more likely it is that you won't have everything you need to file your taxes by April 15. Often, private equity, venture capital, and hedge funds are structured as partnerships, which means their earnings generate so-called “Schedule K-1” forms, which sometimes take until late summer to arrive.

Christine Freeland, a certified public accountant in Chandler, Ariz., says brokers are putting more of her clients in energy or real estate partnerships instead of (or in addition to) mutual funds, which means more K-1s. Some clients don't even know how many K-1s they'll be getting, she says, and they think their return is ready until they receive an additional K-1 in the mail. Sometimes the partnerships—which have to finish their own returns before they can issue K-1 forms—get extensions, although they must file by Sept. 15.

Simpler investments that generate 1099 forms can slow down the process, too. Brokerage statements have to be out by Feb. 15, but many note that the information may not be final. One of Freeland's clients once handed her a corrected brokerage statement that hadn't arrived until April 15.

2. You're waiting on other people.

The more middlemen standing between you and your tax forms, the greater the chances of delay. According to Bill Zatorski of accounting firm PwC, a common sticking point for wealthy taxpayers is data from funds of funds, hedge funds that invest in hedge funds. A fund of funds can’t send you a K-1 until it receives K-1s, or other needed forms, from all the various funds it holds.

Adding to the delay, says Kevin Meehan of Wealth Enhancement Group, is that investors rarely hold funds or other investments directly. Everything gets funneled through brokerages. You wait for your brokerage, which is waiting for your fund-of-funds, which is awaiting forms for all the funds it holds. An extension until Oct. 15 is only a partial solution for taxpayers with late tax forms: They still must pay an estimate of what they owe by April 15, even if the full return comes later.

3. The tax code is more complicated.

If all else fails, blame Congress. Taxpayers already must follow different rules for wages, capital gains, and two types of dividends—those that get taxed at a lower tax rate and those that don’t meet the “qualified” criteria. In 2013, yet another tax category was added, a 3.8 percent net investment income tax on married couples earning more than $250,000 per year.

Under a 2010 law, taxpayers also now must report all their overseas holdings—a process that sometimes requires the close reading of K-1 footnotes, Zatorski says. Finally, there’s the alternative minimum tax, or AMT, a parallel tax system designed to limit the deductions that wealthier Americans can take. Plenty of those affected aren’t particularly wealthy. About 4.2 million people were ensnared by the AMT in 2014, the Tax Policy Center estimates, up 8 percent from the year before. The AMT alone can almost double how long it takes to fill out a tax return, the National Taxpayer Advocate says.

Most Suspicious IRS Audit Triggers

According to Accounting Today, the Minnesota Society of CPAs has compiled a list of red flags that could trigger an audit from the IRS if they apply to your clients' tax returns.

1. Misreporting Your Income
Always make sure your income on your Form W-2 and Form 1099 matches the reported income on your return.

2. Unusually High Charitable Deductions
You may raise some eyebrows if your charitable donations are well above average for your income range.

3. Unusually Low Salaries
The IRS takes a close look at S corporation compensation practices, particularly if the salary paid to a principal owner looks suspiciously low.

4. Your Social Security Number Is Wrong
Make sure you clearly write or carefully type your Social Security number to avoid added scrutiny over your hand-filed return, or the rejection of your e-filed return.

5. Claiming Losses from “Hobby” Activities
Certain types of businesses showing losses, such as horse racing or horse breeding, will often generate increased attention.

6. Claiming a Different Amount for Your Alimony Deduction or Alimony Income than Your Ex-spouse Claimed for the Corresponding Item This is easy pickings. You must report the Social Security number of your ex-spouse when you report your alimony deduction.

7. A Large Amount for Meals and Entertainment Expenses
Sizable meals and entertainment expenses for your type of business are common targets.

Retirees Face April 1 Deadline

Many Retirees Face April 1 Deadline to Take Required Retirement Plan Distributions
IR-2015-55, March 19, 2015 — The IRS today reminded taxpayers who turned 70½ during 2014 that in most cases they must start receiving required minimum distributions from Individual Retirement Accounts and workplace retirement plans by Wednesday, April 1, 2015.

Beware of the IRS' "Dirty Dozen" Tax Scams

This just in from Neikirk, Mahoney & Smith, one of Louisville's leading accounting firms, the Internal Revenue Service wrapped up the 2015 "Dirty Dozen" list of tax scams today with a warning to taxpayers about aggressive telephone scams continuing coast-to-coast during the early weeks of this year's filing season.

The aggressive, threatening phone calls from scam artists continue to be seen on a daily basis in states across the nation. The IRS urged taxpayers not give out money or personal financial information as a result of these phone calls or from emails claiming to be from the IRS.

Phone scams and email phishing schemes are among the "Dirty Dozen" tax scams the IRS highlighted, for the first time, on 12 straight business days from Jan. 22 to Feb. 6. The IRS has also set up a special section on IRS.gov highlighting these 12 schemes for taxpayers.

"We are doing everything we can to help taxpayers avoid scams as the tax season continues," said IRS Commissioner John Koskinen. "Whether it's a phone scam or scheme to steal a taxpayer's identity, there are simple steps to take to help stop these con artists. We urge taxpayers to visit IRS.gov for more information and to be wary of these dozen tax scams."

Illegal scams can lead to significant penalties and interest for taxpayers, as well as possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them. Taxpayers should remember that they are legally responsible for what is on their tax returns even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

Here is a recap of this year's "Dirty Dozen" scams:

Phone Scams: Aggressive and threatening phone calls by criminals impersonating IRS agents remains an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent months as scam artists threaten police arrest, deportation, license revocation and other things. The IRS reminds taxpayers to guard against all sorts of con games that arise during any filing season. (IR-2015-5)

Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will not send you an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS that takes you by surprise. Taxpayers should be wary of clicking on strange emails and websites. They may be scams to steal your personal information. (IR-2015-6)

Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. The IRS is making progress on this front but taxpayers still need to be extremely careful and do everything they can to avoid becoming a victim. (IR-2015-7)

Return Preparer Fraud: Taxpayers need to be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. Return preparers are a vital part of the U.S. tax system. About 60 percent of taxpayers use tax professionals to prepare their returns. (IR-2015-8)

Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order. The IRS offers the Offshore Voluntary Disclosure Program (OVDP) to help people get their taxes in order. (IR-2015-09)

Inflated Refund Claims: Taxpayers need to be on the lookout for anyone promising inflated refunds. Taxpayers should be wary of anyone who asks them to sign a blank return, promise a big refund before looking at their records, or charge fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via community groups and churches in seeking victims. (IR-2015-12)

Fake Charities: Taxpayers should be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. Be wary of charities with names that are similar to familiar or nationally known organizations. (IR-2015-16)

Hiding Income with Fake Documents: Hiding taxable income by filing false Form 1099s or other fake documents is a scam that taxpayers should always avoid and guard against. The mere suggestion of falsifying documents to reduce tax bills or inflate tax refunds is a huge red flag when using a paid tax return preparer. Taxpayers are legally responsible for what is on their returns regardless of who prepares the returns. (IR-2015-18)

Abusive Tax Shelters: Taxpayers should avoid using abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2015-19)

Falsifying Income to Claim Credits: Taxpayers should avoid inventing income to erroneously claim tax credits. Taxpayers are sometimes talked into doing this by scam artists. Taxpayers are best served by filing the most-accurate return possible because they are legally responsible for what is on their return. (IR-2015-20)

Excessive Claims for Fuel Tax Credits: Taxpayers need to avoid improper claims for fuel tax credits. The fuel tax credit is generally limited to off-highway business use, including use in farming. Consequently, the credit is not available to most taxpayers. But yet, the IRS routinely finds unscrupulous preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds. (IR-2015-21)

Frivolous Tax Arguments: Taxpayers should avoid using frivolous tax arguments to avoid paying their taxes. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000. (IR-2015-23)

The Death Tax - the issues pro and con

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.