The head of the House Ways and Means Committee says he plans to begin work shortly on a permanent solution for the federal estate tax that was temporarily repealed for the year 2010. Other Bush Administration era tax cuts are also set to expire at the end of this year. “The sooner we do it the better, because the longer the vacuum, the more complicated it becomes,” Acting Chairman, Sander Levin, D-Mich., said. “You can’t plan if you don’t know what it is going to be. We have to write it so we don’t disrupt estate planning in this country.”
Under legislation passed in 2001, the estate tax was slowly phased out, and was eliminated entirely as of January 1, 2010. At the same time, carryover basis rules were reinstated, so heirs must pay capital gains tax on the full appreciation in assets they inherit, if they ultimately sell those assets. The estate tax repeal was passed on a temporary basis, however, and the tax will return to its pre 2001 rate of 55 percent, with a $1 million exemption, on January 1, 2011, if Congress does not act. Budget constraints have kept lawmakers from making the repeal permanent.
Levin said he favors proposals to reinstate the estate tax at its 2009 rate of 45 percent, with a $3.5 million exemption, as provided under legislation passed by the House in December. But a large number of Republicans and moderate Democrats, including many members of the Senate, prefer a 35 percent rate and $5 million exemption. Either proposal would cut short the current tax free status for estates, in return for reducing the amount of tax that heirs would otherwise face next year. It is unclear whether a reinstated estate tax could be applied retroactively to January 1. As a compromise, Levin said his committee is considering whether families of those who have died since then should be given a choice of paying under 2009 rates, or paying the lower capital gains tax on sales of assets they inherit.