The Status of the Estate Tax as We Near the End of 2010

It appears that the end of 2010 will also be the end of an era of no estate taxes.  On January 1, 2011, the estate tax rate is set to jump from zero to 55 percent on estates in excess of $1 million.  I’ve been watching this issue closely this year, hoping that Congress would act before January 1.  That’s still a possibility, but becoming less likely as political sparring over the Bush income tax cuts keeps the focus off of the reinstatement of the estate tax.

The Obama administration favors allowing the Bush income tax cuts to expire for high wage earners but extending the tax cuts for middle-income taxpayers; the Republican leaders insist that the tax cuts be preserved for all income brackets.  Senate Republicans were able to filibuster a Democrat-proposed middle class tax cut this weekend.  But as of this morning, Sen. Mitch McConnell (R-KY), the Republican leader in the U.S. Senate, is optimistic that a deal will be reached by year end to extend the Bush-era tax cuts for all income levels.

Meanwhile, the estate tax debate has been sidelined.  But it is still an important issue for Americans, according to a recent Gallup poll.  When the issue is discussed, most Congressmen take one of the following three positions:

1. $3.5 Million Exemption; 45 Percent Top Tax Rate.  The Responsible Estate Tax Act, introduced by Senator Bernie Sanders (I-Vt.) back in June, is perhaps the best representation of this view.  This would put us back in about the same place that we were in 2009 (although Sanders’ Act does have a few changes, such as a billionaire surtax). Many Democrats, including Majority Leader Harry Reid, favor a $3.5 million exemption and a 45 percent rate.
2. $5 Million Exemption; 35 Percent Top Tax Rate.  Senators Blanch Lincoln (D-Ark.) and Jon Kyl (R-Arz.) want to cap the top tax rate at 35 percent after a $5 million exemption.  The Lincoln-Kyl bill allows the estates of taxpayers who die in 2010 to choose between current law and their proposal.  Many Republicans, including Leader Mitch McConnell, and some conservative Democrats favor the Lincoln-Kyl proposal.
3. Permanent Repeal.  There has been a recent resurgence in the push for estate tax repeal.  Some Republicans are still pushing for permanent repeal, and anti-estate-tax group the American Family Business Institute has heralded a pro-repeal majority in Congress.

So the current estate tax situation is both promising and frustrating; promising because no one is happy with the $1 million exemption that will apply in 2011, but frustrating because Congress has not been able to agree on an alternative.