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House Votes to Extend Tax on Estates Above $3.5 Million

The House has voted to permanently extend a 45 percent inheritance tax on estates larger than $3.5 million, canceling a one-year repeal of the tax set to begin next month.

Taxes
Casey Serin
Taxes

Under the bill, estates smaller than $3.5 million would continue to be exempt from the tax, and married couples, with a little estate planning, could exempt a total of $7 million.

The bill passed the House by a 225-200 vote. Similar legislation is pending in the Senate, but the health care debate there could preclude action on the estate tax before Congress breaks for holidays later this month.

A similar effort is afoot in the Senate, but the health care debate there could preclude action on it before Congress breaks later this month for holidays. There are also disagreements among senators over the tax rate and the size of estates that should be exempt, further clouding the bill's prospects.

Under current law, the federal estate tax is scheduled to temporarily disappear next year before returning in 2011 at an even higher 55 percent rate. During the year without an estate tax, all estates would be subject to capital gains taxes that they now avoid.

Under the House bill, estates smaller than $3.5 million would continue to be exempt from the tax, and married couples, with a little estate planning, could exempt a total of $7 million. That leaves less than 1 percent of all estates subject to the tax.

Some liberals have complained that the bill is a giveaway to the rich because it would result in lower rates in future years than what current law provides. Conservatives have labeled the estate tax a "death tax" and argue it should be repealed permanently.

"We're trying to forge a compromise that resolves this issue once and for all," said Rep. Earl Pomeroy, D-N.D., who sponsored the bill.

Rep. Kevin Brady, R-Texas, said the bill does not do enough to protect heirs who inherit family farms and small businesses.

The quirk in the law, in which the estate tax would disappear for only a year, came out of a series of tax cuts enacted in 2001. Many Republicans, who controlled Congress at the time, wanted to permanently repeal the estate tax then. But they settled on a gradual reduction, with a one-year repeal, to reduce the impact on the federal budget deficit.

Under current law, the estate tax would return in 2011 with a $1 million exemption and top rate of 55 percent, unless Congress acts.

Permanently extending the tax with a top rate of 45 percent on estates larger than $3.5 million would raise about $14 billion a year. However, it would raise less than current law over the next 10 years—an estimated $234 billion less. The lost revenue would be covered with increased borrowing.

Currently, the tax affects few estates. In 2009, about 5,500 estates will be subject to the tax, according to projections from the Tax Policy Center, a Washington think tank. That's 0.23 percent of all estates.