If you were anxiously awaiting the news about where the estate tax parameters would land at the end of the year when tax relief was being discussed you couldn’t help but feel pretty good about the new $5 million exclusion and 35% max rate.
But in retrospect people should probably temper their enthusiasm and see this tax in the appropriate light. A 35% federal levy on money that has already been taxed should never be viewed as a positive. Yes, it is better than the 55% that was scheduled. But there is no logical reason why anyone should have to pay even 1% on assets that they are leaving to their loved ones after they pass away. Why should the act of dying serve as a tax trigger?
And a $5 million exclusion is better than the $1 million that was scheduled for 2011, and it beats the $3.5 million exclusion that was in place in 2009. But why should one person pay this tax when his or her neighbor is exempt, regardless of the exclusion?
The pro-tax crowd likes to fan the flames of the class wars by drawing a line in the sand between “the rich” and “the rest of us.” Of course most of those who spin things this way are wealthy themselves, but that is another article.
But, to make this point accessible to everyone, they sure sell a lot of lottery tickets around the world, and there are big winners every week. If you won $100 million in the Powerball lottery in New Jersey they would take out 25% for federal income tax and 10.8% in state tax. So that would be roughly $36 million shaved off the top and your $100 million win would net you $64 million.
If you were to die the day after you deposited the money in the bank, $59 million of that would be taxed at 35% as it was being passed on to your loved ones. That is $20.6 million. So you won $100 million, and virtually overnight it has been whittled down to $38.4 million.
Do you think this is fair? Remember, that remainder will be taxed when your heirs pass away, and this pattern continues for generations until all that is left of the $100 million is the $5 million that fits under the exclusion.
In the final analysis, any tax relief is always going to be embraced. But a 35% tax selectively imposed on assets that have already been taxed is not something to celebrate.
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