Estate Tax Saga Continues

Recently the House passed legislation that would permanently extend the 2009 state tax rates and exemptions. However, the Senate may not act on the bill before the end of the year, Biz Journals reports. If an estate tax bill isn’t enacted by the end of the year, the federal tax on inherited assets would go away for 2010. The tax, however, would be scheduled to return in 2011 at much higher rates and lower exemptions.

If confusion is your first reaction, you’re not alone. A little history: In 2001 Congress passed a 10-year tax bill that gradually phased out the estate tax. At the time, supporters of estate tax repeal hoped they could win permanent repeal before the tax returned at 2001 levels in 2011. Now, as 2009 draws to a close, permanent repeal is off the table.

The House voted 225-200 to make the current estate tax rate of 45% permanent and exempt $3.5 million of assets from the tax. Many groups representing family-owned businesses agree that the estate tax is unfair and should be repealed, but they’re willing to settle for permanent estate tax legislation that would reduce the tax rate to 35% and raise the exemption to $5 million, Biz Journals reported.

Plus, family-owned businesses also want the exemption to be adjusted for inflation. Otherwise, more Americans would be subject to the tax every year. Bill Rys, tax counsel for the National Federation of Independent Business, said the estate tax exemption needs to be high enough so that it’s not an issue for small businesses. Nearly all small business owners, however, will continue to be exempt from the estate tax if the 2009 exemption is continued, according to the Center for Budget and Policy Priorities.

Allowing the estate tax to lapse Jan. 1 would create its own set of problems, especially if Congress reinstated it later in the year. For one thing, it’s not clear if Congress could apply the tax retroactively to the estates of people who died during a period when death wasn’t a taxable event. Any attempt to do so likely would be challenged in court. However, with the Senate stuck on health care reform, it’s not clear whether that chamber will address the estate tax’s future before the end of the year.