"Knowledge will forever govern ignorance"

--James Madison--

"The real division is not between conservatives and revolutionaries, but between authoritarians and libertarians"

--George Orwell--

Please Read This Before Killing Your Rich Uncle

A few days ago, I wrote about the temporary expiration of the Estate Tax.

Only 6 Months Left To Kill Your Rich Uncle

Since then, it has come to my attention that, for the first time ever, a US billionaire has died without his estate being subject to the tax.

Death, But No Taxes

Congress actually has until September to fix this so that 2010 doesn't end up being the most lucrative year ever for rich people to die.  If they do it, then I hope this guy's heirs put some money aside to pay it.

But if  they don't the tax burden will be shifted even more to the middle class.  Why?  Because of "stepped up basis".

As something of a compensation for having an Estate Tax to begin with, Congress instituted the stepped up basis rules.  In a nutshell, this rule gives everybody a six month period during which they can sell off Grandpa's GE stock that he bought in 1943, or Grandma's million dollar house that she paid $20,000 dollars for 40 years ago, without recognizing any capital gain.  The basis (or cost) of the asset is whatever it was at the time of death or 6 months afterward, instead of what Grandpa actually paid for it back in 1943.  The law also allows you to  take long-term capital gains treatment (rates that are currently 0%  and 10 )for the asset, even though you may not have owned it for more than a year.

The theory behind this was that, since the asset had already been taxed, that the heirs shouldn't then have to pay more tax on the same asset when they sell it.  So, they provided a rule and a time window that lets you escape taxation on the sale of inherited assets.  Even better, this rule applied even if grandpa wasn't wealthy enough to have to pay the Estate Tax in the first place.

One positive of this is that it will actually increase tax collections, especially from the wealthy.  They'll still sell grandpa's stock so they can have the money instead, but now they'll have to pay income tax on the profits.

One big downside is that it will also affect the middle class greatly.  Grandma bought that house a long time ago, maybe now the area has become more desirable, and the house is worth many times what she paid for it back in 1970.  You sell the house, to split the money with your siblings.

You each get $250K from the sale, but you have to pay tax on it as ordinary income.  You didn't own the house for more than a year, your grandma did.  She only paid $20,000 for the house, so your basis is about $5000 or so.  The resulting gain could easily cost you $60K-$80K of income tax, even though you're not wealthy, and grandma's estate wouldn't have been taxable anyway.

All things considered, this is another example (along with rate reductions, lower rates for investment income, etc) of the horrid 2001 tax bill not only reducing rates across the board, but also underhandedly shifting much of the country's tax burden down the line to the middle class, and away from the wealthy.

Non-wealthy teabaggers need to think about this before just reflexively opposing the reinstatement of the Estate Tax.  While few of them will ever pay any Estate Tax, almost all of them pay income tax every year.  Many will end up paying more tax after their grandpa dies than they would have if the Estate Tax had still been in place.

Congress has until September to fix this.  If they don't, be sure to tell your conservative friends that the Republicans raised their taxes--again.