The Trump administration recently released the tax reform framework. This proposal includes the elimination of the estate tax, sometimes referred to as the death tax, and the GST tax. The GST tax is a tax on gifts to generations below your children. This of course would be a big political win for the President, but does it really matter to you? Currently, the federal estate tax kicks rate is 40% on individual estates over $5.49 million. A married couple can shelter nearly $11 million. The most recent data shows that only 4,918 households paid estate taxes in 2015. The Tax Policy Center estimates there will be only about 11,300 estate tax returns filed in 2017, of which 5,500 will be taxable. To put these numbers in context, the Population Division of the Bureau of the Census projects that 2.7 million people will die in 2017. Thus, an estate tax return will be filed for only 1 in 237 decedents, and only 1 in 487 (or 0.2%) will pay any estate tax. The reality is that for most people the estate tax was effectively repealed back in 2013 when the higher exemption rate became permanent. For those with an estate tax issue, the repeal is a definitely great news. But for others, it may actually mean higher taxes.
The real issue for most people to watch for is what happens with the stepped-up income tax basis. It is unclear right now what will happen to the stepped-up income tax basis. Many of the proposals floated would eliminate the stepped-up basis. Unfortunately, that would be far more detrimental to most tax payers than any benefit received as a result of the estate tax repeal. While determining tax basis can get very complicated, the original tax basis of an asset is, generally speaking, its cost. For example, if you purchase a parcel of raw land for $10,000, your original tax basis is $10,000. If you subsequently sell the land for $300,000, your taxable gain is the difference between your tax basis and the sales price, or $290,000. Under current law, if you wait until your death to give the land away to your beneficiaries, the potential gain or loss on the sale of the property is eliminated and the estate or heirs take the property with a new income tax basis equal to the fair market value of the property. The fair market value is generally determined as of the date of death. Therefore, if you pass the property described above to your heirs at your death and the fair market value is $300,000, the new tax basis is $300,000. If the property is then sold for $300,000 there is no taxable gain – a potentially significant tax savings!
So keep an eye on this one. The much hated death tax may go away, but you may actually end up paying more taxes.