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Estate Tax.... up next for debate
i just got an email blast from a client that my state had abolished its estate/gift tax, but the blurb mentiones that the $5.12/m exemption amount is set to expire are revert back to $1M on Jan. 1, 2013
Re: Estate Tax.... up next for debate
I was under the impression that Bush had only set it higher for a year. Which is kind of creepy, if you think about it. Probably as a ploy to push forward other tax legislation while having to "renew" it, but that didn't work.
And Blanche Lincoln was one of the biggest proponents of no estate tax. The Waltons have a lot of money to contribute to campaigns, yo.
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The code gives you a credit for state estate taxes on your fed estate tax return. Most states have a "sponge tax" that just says we'll take the max. allowed for deduction puproses by IRS. A few states have an actual estate and gift tax. TN and NH come to mind. TN is getting rid of theirs so now residents will just be subject to federal estate tax
I think we need a higher estate tax otherwise the rich are just going to keep getting richer by passing wealth to the next generation in obscene amounts
Above Us Only Sky
We already have a problem with income inequality. ITA the estate tax should be higher.
On the subject of taxes: is it true that we 're the only country (or one a few) who taxes dividends at all? Someone told me this recently when I mentioned that I thought they should raise this rate as well.
I think the argument is that $1 million is not an obscene amount. Considering financial planners say $2 million is a decent amount to retire on? If you hit that goal and then drop dead at 67, well, your kids have to give up 1/2. Just for being responsible and maxing out your retirement contributions.
I expect someone to make the argument that most people do NOT obtain that amount of wealth before retirement, but the fact remains that if one is encouraged to max out a 401k and an IRA and does achieve what society says you should, you are punished.
FWIW, living off the capital gains income of $2 million leaves you with about $100k in income a year with conservative investments, on average. Not the American average, of course, but also not a 1%-er. More like a 20%-er.
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ITA with SBP. I think people tend to forget that even without the estate tax, the person inheriting that money STILL PAYS TAXES on that money in the form of income tax. So, if Joe inherits $2 million, with the estate tax the govt takes $1 million and Joe gets $1 million, then pays income taxes on that $1 million at whatever the going rate is that year. Is it 30% right now? I don't have time to look it up... Say it's 30%. So Joe then actually only winds up with $700,000 from that $2 million.
Without the estate tax, Joe gets $2 million, then pays 30% in income taxes and winds up with $1.4 million. The government still gets a bunch with or without the estate tax. The 50% thing is just awful. It's like the government saying, "We were just letting you keep that money. It was never really yours."
The issue of special needs children is tricky, I'll give you that. Maybe there is another way to approach that though to make sure they are protected. But in a time of rising wealth inequality, I don't know why we prioritize protecting the interests of children of the wealthy who did nothing on their own to "earn" that money other than simply being born lucky.
As for why the Obama admin. has it set so low, it's probably for the same reason they classify income at $250K and over as "rich." You capture more tax dollars that way. There's no objective standard of wealth in this country. But the fact is, we do need to raise tax revenue. The wealthy benefit from things like a low dividends tax rate, estate tax rate, mortgage interest deduction, ect. I think the conclusion that many are reaching is that they don't need to be helped out any further than they already are. OTOH, I do agree with those who oppose regular income tax rates set at over 50%. I think that's starting to verge on punitive. There's probably some middle ground that could be reached with the wealthy giving up some things that benefit them and spending cuts.
Not to mention if there are several kids in the family and it is meant to be divided equally the numbers can dwindle pretty quickly. If you have a good planner there are several things you can do with AB/bypass trusts and other options but you've got to have it all planned out and make sure you are caught up on the current exemptions.
If you were going to be willed 2 million dollars of your parents hard earned and already taxed money would you be satisfied with walking away with 1 million..or if you have a sibling $500,000? Gifting to your kids while you are alive is a great option but of course there are limits on that too.
As much as I want to fix income inequality and increase revenues, I just think the estate tax is wrong in principle. Why should you have to pay the government to inherit money that has already been taxed?
I'd much rather see an increase in the capital gains tax than the estate tax. At the very least, the ceiling should be raised to significantly higher than $1M, for the reasons SBP outlined.
This explains what happened to those who lost a loved one in 2010. My FIL died that year between the important dates and it was a bit of a clusterfuuck for estate planners at that time. No one knew what to do...not even the people in charge.
http://wills.about.com/od/understandingestatetaxes/qt/2010-Estate-Tax-Rules.htm
I'd be fine with all of that too. At least those aren't a double tax. Capital gains taxes are only taxes on the money you earn from investing, and let's be honest, you can invest money without any work whatsoever. Tax it, why not. I'd be cool with taxing it at the same marginal tax rate as income.
In an ideal world, if the government provided a variety of good safety nets, kept public college costs low and the education at a good quality, had policies supporting families such as federal maternity leave and more, better, non-income dependent subsidized child care, and made sure every citizen had access and means to health care, I'd be fine paying a 50% income tax rate. Really, I'd have to save a lot less for college and for health care and even retirement, so...
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I do agree, however, that 1 mil is probably a little low. Nevertheless, I'm always surprised at how many people, who have almost no chance of leaving an estate worth more than 1 mil, are so militantly in favor of eliminating it.
Anything you can achieve through hard work, you could also just buy.
This is what I keep saying. You're already paying for all this stuff. I'd rather pay more in taxes and actually have something to show for it than pay what I'm paying now and feel like i'm throwing into a black hole of god knows what.
This. I think $1M is low. $5M is probaby a good number to start progressive estate tax rates.
Above Us Only Sky
Wait, what?
I was admittedly terrible in tax class, and T&E was taught at 8am, so this is all a little fuzzy to me. But I really thought that estate taxes were just that - taxes paid out of the estate - and that whatever an heir inherits after the estate taxes are paid is received tax-free. It's the same concept as gifts, right? That the recipient doesn't pay taxes, but it has implications for the estate.
According to the IRS website, my memory is generally correct (unless you're dealing with a "covered bequest" from an expat):
No tax payable by the person receiving your gift or bequest. Generally, the person who receives your gift or your bequest will not have to pay any federal gift tax or estate tax because of it. Also, that person will not have to pay income tax on the value of the gift or inheritance received. However, covered gifts or bequests received from expatriates after June 16, 2008, may be subject to tax which must be paid by the recipient. Consult a qualified tax professional for more information.
We cross-posted. Read the link I posted. Gifts are tax-free to the recipient, not the giver. Same with bequests.
In a former life I was a tax attorney.
The estate tax is not the only "double tax" the corporate tax is considered a double tax too.
That said certain assets are treated differently. You will find your college begging you to donate your 401k/IRA because it does have unfavorable tax treatment at death, but that unfavorable treatment is a result of the favorable treatment it received while living. Roths are not subject to this
Your 401k is built income tax deferred meaning you contribute to it during your lifetime and avoid paying income taxes on the amount contributed. It also grow income tax deferred so you never pay cap gains on the earnings inside your 401k. If and when you start taking withdrawals from your 401k once you turn 70.5 you pay income tax on the minimum distribution amount each year. IF you die with $$$ inside your 401k it has never been subject to income tax, there for it is an asset of your estate subject to the estate tax and your heirs have to pay income tax on their distrubutions from it.
Above Us Only Sky
Anything you can achieve through hard work, you could also just buy.
Where are you seeing that?
I am going based on this:
Who pays the gift tax?
The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.
And this:
Example 3. You give $25,000 to your 25-year-old daughter. The first $13,000 of your gift is not subject to the gift tax because of the annual exclusion. The remaining $12,000 is a taxable gift. As explained later under Applying the Unified Credit to Gift Tax, you may not have to pay the gift tax on the remaining $12,000. However, you do have to file a gift tax return.
...
Filing a Gift Tax Return
Generally, you must file a gift tax return if any of the following apply:
You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
You and your spouse are splitting a gift.
You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
You gave your spouse an interest in property that will be ended by some future event.
I haven't seen anything that saying that a gift recipient pays income tax on the gift. I did not know that about 401(k)s. Of course, before the tax on 401(k)s is lifted, it would be nice to see the tax advantages of a 401(k) extended to everyone, regardless of employer. (Says the bitter betty without access to one.)
In all honesty, I really have no strong feelings on the estate tax, and I like reading different perspectives one it. I just want to make sure we're operating with correct information.
Anything you can achieve through hard work, you could also just buy.
I'm pretty strongly against estate taxes, though it's a bt different up here. That being said, if they are going to exist, it should certainly be at a higher threshold than 1m, which is what most people should be aiming for to retire safely.
I do consider it to be a form of double taxation, unlike capital gains which are taxable only on additional gains, not the whole investment.
I do know many financial planners suggest giving $$ away before death to prevent the estate tax,but obviously the timing and circumstances have to be right on that one.
There is a lot of confusing and mis-information in this thread.
Until January 1, 2013, the exclusion amount is at approximately $5 mm per person. Right now, it is set to revert to $1 mm on January 1, 2013, but the generally accepted thought is that Congress will act and have it go back to the 2009 level of $3.5 million per person, but really no one knows what will happen. Everyone was shocked when it was appealed in 2010 and shocked again in 2011 when the exclusion amount was brought up to $5 mm. It has been a volatile couple of years.
I don't know where some of you are getting $14K as the annual gift tax exclusion from, but that number is currently at $13K per person, per year. So you can gift $13K annually to as many people as you want tax free. And you can accept gifts of $13K annually from as many people as you want tax free. So, your dad and your mom could each gift you $13K (for a total of $26K) in tax free gifts. This is not limited to family.
You can gift more than that amount and have it go to the recipient tax free, but then the amount over $13K is deducted from your lifetime exclusion (which, right now, is set at approximately $5 mm). So, I could give my friend a gift of $2,013,000. She could receive that gift free of estate and gift tax, but it would reduce my lifetime exclusion amount by $2 mm (so, in 2012, it would reduce my total lifetime exclusion amount to about $3mm).
There are ways to set up life insurance in trust so that the premiums qualify for the annual exclusion amount and the life insurance proceeds are not includable in your estate when you die. All of you with special needs trusts that are going to be funded with life insurance may want to discuss this option with your estate attorneys to avoid the estate tax on those proceeds. It can save you a bundle and is easy to do.
States set thier own estate taxes. Many states do not have an estate tax.
I am fairly certain that you do no pay income tax on inherited assets. The double taxation in the case of estate tax is that the decedent payed tax on those assets during his or her lifetime and then the assets are taxed as they pass to the next generation.
Finally, it is my opinion that $1mm per person is a little low for the lifetime exclusion amount. It is easy for average people in high cost of living areas to reach that threshold. I would like to see it at $3.5mm, because $5mm is actually really high. In community property states, it means that a couple would have to have more than $10mm to get taxed, and that is absurd, especially with so many ways to remove assets from your estate to avoid taxation on those particular assets.
Final Siggy Challenge: Favorite photo with FI
At the Apple Orchard
Thank you for pointing out the benefit of socialism. :-) Spread around the benefits, spread around the risk. Just like insurance.
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Tax rates can change over someone's life time - that is subject to Congres' whims just like the estate tax is.
Sure there is. Make it 5 million. Or, if you think in that way it is similar to most tax policy, well then I don't see how it's particularly problematic.
As for the it was already taxed argument. You know, I pay income tax, then I go to the store and buy something and pay sales tax. It happens any time money changes hands. Oh, if you own a home, you also pay property tax.
Your parents paid taxes on their earnings, when you inherit it you pay taxes. I really don't have a problem with that.
I have absolutely no problem with letting the kids get everything and leaving Uncle Sam with squat. The point of making the money in the first place was to provide a comfortable life for you and your children, and the taxes were paid on the first go round. Congratulations. Job well done.
If your kids are as entitled as people seem to think, they're just going to blow it on goods and services in the stream of commerce, which is a damn sight better than sending it to the government. Rich kids: buy yourself a yacht and give 4 carpenters, 2 electricians, and a painter some work.
The idea that they don't 'deserve' money just for burying their parents is ridiculous, and a red herring. How many people made out like kings in subprime meltdown? How many people are flipping foreclosures? Now we're going to pretend to give a fluck who 'deserves' money? Please. By all means, lets start letting money go only to people who actually deserve it.