President’s Budget Would Trim Estate Exemptions

President Barack Obama’s proposals to increase middle-income tax cuts would come partly at a price to the estates of higher-income households.

Under the new budget released Monday, the president calls for turning back the clock on estate taxes to 2009, when an individual could shelter $3.5 million — double that for married couples — from the federal estate tax. Currently, the exemption amount is $5.43 million per person. The top tax rate on estates would also go up under the president’s budget to 45 percent from 40 percent.

>> Sign up for the AARP Money newsletter

These changes are in addition to administration proposals outlined last month to change the way estates are taxed. Right now, capital gains on investments and other assets that are not sold before a person’s death are not taxed. The president claims that hundreds of billions of dollars of capital gains go untaxed annually because of this.

His proposed fix: eliminating something called the “stepped-up basis.” The basis is what you originally paid for an investment, and that’s the figure used to determine at the time of sale how much of a taxable gain you have. When you die, though, that basis is revised or stepped up to reflect the value at the time of death. If your heirs sell that investment, they would have to pay tax only on any gains occurring after your death.

Obama would allow an individual to pass on up to $100,000 in capital gains — $200,000 for married couples — to heirs without tax. Up to $250,000 in gains on a residence — double that for couples — could also be bequeathed without tax consequences.

>> Get discounts on financial services with your AARP Member Advantages.

And for those who must pay capital gains tax, the president wants to raise the top rate. According to the Treasury Department, the top rate on capital gains is now 20 percent; it would go to 24.2 percent under the president’s budget. Add in the current 3.8 percent investment income tax on higher-earning households, and those households would pay a 28 percent tax on capital gains.

Yet all the talk going on now about tax increases and cuts may be just that. The Democratic president must get his proposals through the new Republican-controlled Congress.

Photo: Andrew Harrer/Bloomberg via Getty Images 

Also of Interest

• Social Security Expands Office Hours
• 6 Places Never to Use Your Debit Card
• AARP Foundation Tax-Aide: Get free help preparing and filing your taxes
• Join AARP: savings, resources and news for your well-being

See the  AARP home page for deals, savings tips, trivia and more.