I have always been a supporter of the elimination of the Estate tax on principle alone. It is the taxation of money earned that has already been taxed.
When you earn a paycheck it is taxed. You take what is left to the store and buy goods and services. When you do so, those goods and services are taxed at the register.
Then then profits the store that sold them to you are taxed, the employer is taxed for paying the person who sold it to you, who is in turn taxed on that pay.
That employ takes what they can after taxes and invests it in their future and what they earn on that money is taxed. If they invested it in a home, farm, business property, that property is taxed annually. If they merely put it in a savings account the interest earned is taxed.
Then whatever they managed to save is taxed again when they leave this world.
I just feel that it is a form of taxation we could do without. Especially when you consider that some people can inherit property and be forced to sell it just to pay the tax bill, regardless of there intentions to keep a business running that might be a benefit to the local economy and / or community.
However, as I understand it from what I heard on the news last night, the new ceiling on the Estate tax is 1 million dollars. If an estate exceeds 7 million dollars the estate tax is levied on the 1,000,001th dollar an those there after. This seems like a reasonable limit (far better the the 600,000.00 of just a few years ago) if it is accurate.
I feel there should be a larger exemption for all (say 2,500,000.00) and a much larger one for real property so those family farms and businesses (current exemption for these seems to be $820,000.00). Just because a family farm maybe worth 20 million in New Jersey doesn't mean that the family working it lives much better then the lower middle class on it. I'd rather see family farms stay family farms instead of another condo neighborhood or strip-mall.
(Note: my numbers come from this IRS Publication
)1) Do you support Congress' effort to eliminate the Estate tax at this time? Why or why not?
Some might be surprized by this but no, I do not. 1 million seems like a good limit for now. An additional limit for farm / business real property should be written into the law immediately, but when you consider all of the things we have to deal with right now, fighting to eliminate the estate tax seems like a terrible waste of time if not a negligent use of it.2) If the tax were made more equitable, ie. would avoid burdening family run businesses and farms but still existed for large wealth transfers where means were evident, would you support keeping it?
Yes and no. I feel that is the answer today on the practical level. On the principle though, I feel that we should one day eliminate this tax all together. I just believe we have far more pressing issues to address at this time.
An interesting note is what is Included in the calculations:
Q: What is included in the Estate?
The Gross Estate of the decedent consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706). The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Keep in mind that the Gross Estate will likely include non-probate as well as probate property.
So, Your father bought that land for the farm back in 1928 for 5000.00. And since the population explosion and rapid urban flight the land value has skyrocketed even though it is still barely providing enough support on average to keep the family afloat.
Something interesting here is the "Life-Time" gifts option. So, if your a grandparent, and you have 8 grand children that you give 5 dollars too each time you seen them, and then do as mine did, and buy then a few shares of stock for their birthday and christmas every year until you pass away (lets say 25 years), and say you give their parents a few hundred every holiday as well. Couldn't you pretty easily break that 1,000,000.00 mark on gifts, without intentionally trying to get around the estate tax, and without being wealthy?
(Note: My middle class Grandfather used his retirement savings to give stock in his former company (Standard Oil, later Exxon, Later ExxonMobile) to his children and grandchildren. It wasn't much. A couple of shares here, a couple of shares there. Until I needed to tap into it when I was in a bad way financially, and later taped it again to pay for the rehab of the house I bought for my family it had risen to the level of about 300 shares.)
and what is excluded:
Q: What deductions are available to reduce the Estate Tax?
1. Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass "outright." In some cases, certain life estates also qualify for the marital deduction.
2. Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
3. Mortgages and Debt.
4. Administration expenses of the estate.
5. Losses during estate administration.
The big thing to note is the Marital deduction. However, the most interesting is the Mortgage / Debt deduction. Seems we have yet another government created incentive to live in Debt rather then be independent.
QUOTE(Erasmussimo @ Apr 15 2005, 07:50 PM)
QUOTE(Altari @ Apr 15 2005, 06:01 PM)
What of a local business that has 15 employees? Are the jobs of those 15 people not worthy of remaining intact?
Whoa! You're making a lot of assumptions here! Let's assume Dad has run Joe's Tire Shop for the last umpteen years and now he has died and left the business to Joe Jr. Let's say that the accountant values the Tire Shop at $1 million. The first $625K doesn't count, so the estate tax is applied to $375K. I don't know the bottom rate off the top of my head -- let's just say it's 35%. So Joe Jr. now owns Joe's Tire Shop and he also owes $131K in estate taxes on it. You're assuming that Joe Jr. just flicks it in, lays off his employees, and shuts down Joe's Tire Shop. He'd have to be an idiot to do that. In reality, he'll have two good options:
1. Sell the tire shop to somebody else for $1 million, pay his taxes, and walk away with a cool $869K. Not bad for a kid just out of school, eh? The employees keep their jobs working for the new owner. Everybody's happy.
2. Keep the tire shop and get a bank loan to cover the estate taxes. Since the tire shop has been around for a while, he can probably get a loan for, say, 5%. That will cost him about $6.5K per year to service. His tire shop is earning at least $50K per year in profits, so he has no problem paying off the loan. The employees keep their jobs working for Joe Jr. Everybody's happy.
In neither case do the employees lose their jobs.
Actually there are alot of assumptions on your end as well. What if the best offer is from Starbucks? The business is torn down and replaced with a coffee shop. Assuming the employees at the tire shop want the work, they take a major pay cut going to work for the new business at that location, assuming that they can financially hold out long enough to wait for the construction.
As I pointed out in the beginning of this post. The moneys and values involved here have been taxed to death (pun intended) from a multitude of angles since their existence. Now, we give the business the final death blow (pun intended again) with a tax that quite possibly makes it impossible to earn a profit and maintain it.
You assume a 50,000.00 a year profit on the business. I can only assume that you are considering the owners salary as the profit, because most small businesses I know of run very close to the red just to keep afloat due to the ever increasing costs of doing business including the higher and higher insurance rates, ever increasing costs of complying with government regulation, and the ever increasing costs of labor, materials, maintenance, etc. Do you think an income of $50,000.00 is too much? If the owner is a parent and supports his family on a single income then in many areas of the country (thankfully not mine) he/she would barely be able to support a typical family of 4, if at all.
So in this example, the local community losses a better then minimum wage employer, a source of tax revenue (because surly the local politicians waved taxes on the Starbucks for decades to get them to come there), and a convenient service. What exactly was gained by the community is such a deal other then an overpriced cup of coffee?