Blogs Derek's Tax Blog Analysis of McDermott Estate Tax Bill
Written by Derek W. Jensen
Monday, 08 June 2009 13:45
Over the weekend I was able to obtain a copy of the bill introduced by Seattle congressman Jim McDermott, H.R. 2023. Here is my quick analysis of the bill:
- Exemption: The estate tax exemption is set to $2.0 million. Although this would be considered a tax cut for year 2011 and beyond, when compared to this years exemption of $3.5 million this will be viewed as a tax increase. Taxpayer unfriendly.
- Indexed: The bill includes a provision to automatically increase the exemption in increments of $10,000 for inflation. This is a good thing and is in line with some of the other proposals. Taxpayer friendly.
- Tax Rates: The bill includes a top rate of 55%. Taxpayer unfriendly. However, the tax rates are also indexed. Taxpayer friendly.
- Credit for State Death Tax: The bill restores the credit for state death taxes actually paid. The absence of the credit has created an uneven playing field between the states. For example here in Washington State we enacted the highest state death tax rate in the nation (19%) after the credit for state death tax was repealed. Other states simply repealed their death tax. This discrepancy encourages people change their state of residence. If this bill were passed the states would tend to make their tax provisions more consistent. This would help taxpayers in states that have death tax and it wouldn’t harm taxpayers in states that don’t have death tax. Taxpayer friendly.
- Spousal Carryover: The idea of the spousal carryover is that the surviving spouse can increase their unified credit amount by the amount not used by their spouse at his or her death. On its surface this sounds like a good idea, but this provision may lull people into falsely believing that they don’t need to do planning. If the states don’t create a similar provision, a by-pass trust would need to be created at the first death to maximize the state death tax exemption. Additionally, in order to utilize this provision an election will need to be made on a timely filed estate tax return. A return that may be overlooked by the surviving grantor. Tricky.
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