As Washington struggles to avert a dive over the fiscal cliff, one tax issue at stake – amounting to hundreds of billions of dollars over the next 10 years – hasn’t been getting much attention: the price of death.
Under current law, a person worth $5 million who dies on New Year’s Eve can pass along all of it to his or heirs without any tax. But if the same person were to die the next day, his or her estate would owe millions in federal taxes.
That’s because Bush-era tax cuts – which exempted the first $5 million of an estate from federal taxes – expire like Cinderella at the stroke of the New Year. Afterward, if the tax cuts aren’t renewed, only $1 million of an estate will be free from taxes. And the rest will be taxed at 55 percent instead of 35 percent.
Next year, if the cuts are allowed to expire, about 47,000 estates would owe nearly $38 billion in federal taxes, according to the Tax Policy Center.
For something that affects so few families, it certainly provokes a lot of strong feelings. Democrats and Republicans can’t even agree what to call it. Democrats call it the estate tax, which is the legal name. But Republicans – who would like to kill it off entirely – call it a death tax. And within the Democratic Party, some lawmakers with family businesses (ranchers, for example) side with the Republicans.
Some ultra-wealthy Americans, including Warren Buffett, have been pushing for higher estate taxes. (Buffet is a big believer in passing wealth to charities, not children.)
“We believe it is right morally and economically, and that an estate tax promotes democracy by slowing the concentration of wealth and power,” Buffett and his fellow financial titans said in a letter urging a tax starting at 45 percent on estates worth more than $4 million and heading up from there.
President Obama has so far steered a course between current law and the call for taxing estates even more. He’s pushed for a $3.5 million exemption and a 45 percent tax rate, which would bring in about $20 billion in taxes next year.