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185 IRET Congressional Advisory 1 (2005)

handle is hein.taxfoundation/iretcgadv0182 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. April 11, 2005 Advisory No. 185 ESTATE TAX REPEAL CONSIDERED BY HOUSE The House of Representatives is in the process of considering a permanent repeal of the estate tax. The estate tax (but not the gift tax) is scheduled to expire in 2010, but would re-emerge in 2011 without Congressional action. There are five issues that merit attention as the debate proceeds: treatment of capital gains, revenue scoring, the gift tax, timing, and economic impact. Background The Economic Growth and Tax Relief Reconciliation Act of 2001 raised the unified credit and reduced tax rates through 2009, and repealed the estate tax (but not the gift tax) for 2010. For 2010, the Act replaces the step-up in basis at we have con death with an exempt amount that the estato of $1.3 million for capital gains unfair and taken by beneficiaries, plus an then let us en additional $3 million exemption for capital gains taken by a spouse. Any gains above those amounts require the carry-over of the decedent's original cost basis. The exempt amounts would protect about as much of the estate as is now rendered tax exempt by the unified credit, but would subject assets received from larger estates to a capital gains tax. The bills The House will vote on H.R. 8 this week. H.R. 8 would repeal the estate and generation skipping tax permanently as of 2010, continuing the 2001 Act's substitution of exempt amounts on capital gains for the step-up at death. The gift tax would remain. H.R. 8 is a vast improvement over current law, and should be adopted. An alternative approach, H.R. 64, has been offered by Representative Cox. H.R. 64 would repeal the estate, generation skipping, and gift taxes effective January 1, 2005. H.R. 64 would give a better tax result and better timing, but is not the bill being considered. The Senate may take up the issue later. In the Senate, S. 420 resembles H.R. 8. Senator Sessions plans to introduce ~ie to the realization tax is inherently I counterproduetve, the tax at once. not in a pension a bill to make the same changes as S. 420, but move the effective date to 2005. The sooner, the better. Treatment of capital gains Under pre-2001 law, and through 2009, the tax basis of an ordinary inherited asset (one arrangement) is stepped up to current market value at the death of the owner. Capital gains accrued by the decedent are forgiven. The decedent's original tax basis (acquisition cost) of the transferred asset is not carried over to the beneficiary. By contrast, proceeds from assets in qualified pension plans and regular IRAs, which were originally tax deferred, are taxed at ordinary tax rates when the beneficiaries withdraw funds from the plans. In effect, they have carry-over basis (zero for pensions and traditional deductible IRAs; the amount of original contributions to non-deductible IRAs). g~.I 0 1 g6~ I ~ee

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