Estate Tax and Its Impact on You

By Patricia L Johnson

How would you feel about not having to pay taxes on the first $5 million in income you receive in any given calendar year?

Each year the majority of us file an income tax return with the IRS indicating our income for the previous calendar year, less allowable deductions. In the event too much was paid in taxes a refund is issued, or in instances where taxes are still owed, a payment is made to the IRS.

Our tax money finds its way into the coffers of the U.S. Department of the Treasury and that money, along with other U.S. income, is then used to finance all operations of the United States.

When the country has more than sufficient funds to cover expenditures during a given year, we incur a budget surplus (as we did for several years under President Clinton), which in turn reduces the deficit. If the country spends more than it has coming in it increases the deficit.

Prior to President G.W. Bush taking office the country was operating under a budget surplus for three years running and it was decided to give some money back to the taxpayers in the form of numerous tax cuts.

The first cut that was put in place was EGTRRA, PL 107-16, Economic Growth and Tax Relief Reconciliation Act of 2001. This one bill made sweeping changes to our tax system, including estate taxes. Prior to passing EGTRRA, the estate tax exclusion was $675,000, with a tax rate of 55%.

What does that mean? Let’s say your grandfather passed away in 2000 and left you an estate valued at $5,000,000. The first $675,000 was not taxable, which means you are only paying taxes on $4,325,000.00 at a maximum tax rate of 55%, less deductions (funeral expenses, specific debts, spousal transfers, charitable contributions, administrative costs, etc.). The lifetime unified credit also comes into play in reducing the taxable amount due, but for the sake of simplification we’ll ignore that factor for now.

Let’s be generous and say our deductions total $1,000,000, which brings our taxable estate down to $3,325,000. Taxes at 55% would be $1,496,250.00 and the balance to you would be $1,828,750.00. The final split on this estate would be as follows:

$1,000,000.00 – (estate expenses)

$1,496,250.00 – Internal Revenue Service [$3,325,000.00 x 55%]

$2,503,750.00 – To the beneficiary [$1,828,750.00 + $675,000.00]

$5,000,000.00

So, in calendar year 2000 the United States (you the taxpayer) would receive almost $1.5 million dollars in taxes from this one estate.

Let’s jump forward to 2008, the last year President Bush was in office. EGTRRA was made retroactive to June of 2001, and contained a provision that increased the amount that was not taxable on estates for the next decade, while also decreasing the tax rate. By the end of 2008 the first $2,000,000.00 of an estate was not taxable and the maximum tax rate had been reduced to 45%.

When EGTRRA was passed it was known that there might be a change in administrations after the 2008 election and it was also known that these changes would drastically reduce IRS payments; therefore major waivers were not scheduled to go into effect until years following 2008. Increasing the estate tax under any administration is far easier than reducing it; therefore in 2009 (under EGTRRA) the first $3.5 million was exempt while the maximum rate remained at 45%.

For calendar year 2010, EGTRRA completely eliminated any estate tax so our country went from being able to collect almost $1.5 million in estate taxes on a single estate to a total of .00 in taxes, on this same estate, ten years later. How much income have “we the people” lost over the past 10 years on this one tax cut alone?

It’s difficult to determine what isn’t, especially when estate and gift taxes do not go through detailed analysis each and every year. What we do know is in calendar year 2011 there were 9,447,000 tax returns that had estates valued at over $5 million dollars and the total gross amount of these estates was valued at $139,075,503,000.00 [one hundred thirty-nine billion seventy-five million, five
hundred three thousand dollars].

The IRS indicates the gross amount of decedent estates in 2010 at over one hundred thirty billion dollars, so we are talking about an incredible amount of money. Let’s say for the sake of discussion that only 10% of the $130 billion was taxable. At that miniscule rate, the U.S. Treasury would have received an additional $13 billion in taxes, but instead “we the people” received zero dollars.

The majority of us have a problem wrapping ourselves around a number as large as $13 billion because we just don’t come in contact with numbers that huge on a regular basis so I’m going to try to compare it to something we can all understand. An additional $13 billion in revenues would pay all expenses for the legislative branch of our government for a full three years.

What does that mean? It means it would pay for all costs associated with the funding of the U.S. Senate, U.S. House of Representatives, Capitol Police, Office of Compliance, Congressional Budget Office (CBO), Architect of the Capitol (AOC), Library of Congress (LOC), including Congressional Research Service (CRS), Government Printing Office, Government Accountability Office (GAO), and Open World Leadership Center.

Remember we’re only talking about what we lost in revenues for one year, now multiply by that by the number of years these people haven’t paid their fair share in taxes and we’re talking about a sum of money that would cover the costs of major programs in this country.

The words ‘redistribution of wealth’ were tossed around by Republicans after the President Obama’s State of the Union address on the evening of January 20, 2015. The President’s plan isn’t intended to ‘redistribute’ the wealth, but rather to give back to ‘we the people’ what was taken from us during the prior administration’s tax cuts.

Please keep in mind a couple things – the $13 billion is at a 10% rate, what if the rate was 20% or 30% or 55% as it was in the past before being reduced by EGTRRA? EGTRRA alone contained nine sections and ninety-two subsections so there is plenty of wealth to go around, when it’s taxed appropriately.

© 2015 Patricia L Johnson

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2 Responses to Estate Tax and Its Impact on You

  1. The IRS has records on taxes and who pays what, but someone has to bring it to the attention of the American people because our tax code is just too complex for the average Jane/Joe to figure out. What we’ve lost in taxes over the past decade plus, due entirely to the Bush tax cuts that went into effect in 2001, is no less than a sin. If I recall correctly I wrote an article about Romney and his taxes because he takes advantage of another huge tax loophole https://articlesandanswers2011.wordpress.com/2012/10/03/so-who-pays-the-capital-gain-tax/

    Do you know how well off this country would be if the rich actually had an effective tax rate of 13.9%? The problem is too many of them pay less than that, it’s just not right. There is nothing right about it.

  2. richrd walrath says:

    Why do Americans know so little about
    taxes and who pays them? You hear it said that the rich pay 40% of taxes and receive ONLY 20% of the income. Does anybody ever ask, What percent of their taxes do the rich pay? Mitt Romney
    re-did his income taxes so that he could INCREASE his effective tax rate to 13.9%! That was
    because it was so low!

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