Thursday, February 28, 2008

CRS report discusses pending congressional bills on estate tax

Under provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), the estate tax exclusion is scheduled to continue to rise, from $2 million for decedents dying in 2008, to $3.5 million in 2009. The estate tax is repealed for decedents dying in 2010 only. The gift tax is to remain in place in 2010. In addition, when the estate tax is repealed, there is scheduled to be a significant change in the method used to determine the "basis" of all capital assets transferred at death -- from "step-up in basis" to "modified carryover basis." Whatever basis-valuation rule is in effect for the year of death applies to all capital assets transferred after any person's death, whether or not their estate is large enough to be liable for the estate tax. The estate tax provisions of EGTRRA are scheduled to sunset at the end of 2010. That explains why the repeal of the estate tax is currently scheduled to last for only one year. If Congress does not change the law beforehand, on January 1, 2011, estate and gift tax law will return to what it would have been had EGTRRA never been enacted. The unified estate and gift tax will be reinstated with a combined exclusion of $1 million. The maximum tax rate will revert (from 45% in 2007-2009) to 55%. These large year-to-year differences in the estate tax law mean that wealthy individuals face a wide and erratic variation in their potential estate tax liability over the next four years, 2008-2011, depending upon the year they might happen to die. Following EGTRRA, the House passed a bill to permanently repeal the estate tax in each of the past three Congresses, but the Senate did not pass any legislation addressing the estate tax. In addition, in the second session of the 109th Congress, the House passed two bills that would have modified and retained the estate tax. Thus far in the 110th Congress, seven bills to permanently repeal the estate tax have been introduced in the House and four in the Senate. Seven bills to retain but modify the estate tax have been introduced in the House and one in the Senate. The repeal bills differ on whether or not they would preserve the other changes made by EGTRRA to the taxation of gifts and the basis for inherited assets. The modification bills differ on the level of the exclusion, what year it would take effect, whether or not it would be indexed for inflation, and whether any unused exclusion could be carried over to the estate of the surviving spouse. They also differ on the tax rates, whether special relief would be given to family-owned farms or businesses, and whether the gift tax would be defined separately from or unified with the estate tax. The U.S. Treasury Department's February 2008 estimates show the annual revenue loss from total repeal of the estate tax rising steadily from $58 billion in FY2012, up to $84 billion in FY2018. Even though estate and gift taxes account for less than 2% of federal revenue, permanent repeal of the estate tax accounts for one quarter of the estimated revenue loss of the Bush Administration's FY2009 budget proposal to make permanent the group of tax cuts enacted in 2001 and 2003, measured over the 10-year forecast period, FY2009-FY2018. This report will be updated when new estate tax bills are introduced and when new revenue loss estimates become available.

Source:  Open CRS,

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