Fiscal Cliff Negotiations Move on to Estate Taxes

December 20, 2012

The political wrangling to avoid the so-called "fiscal cliff" continued this week. Many different issues are all tied up in the negotiations, including income tax rates, defense spending, entitlement spending, and control of the debt limit. However, various reports suggest that the both sides in the political battle--primarily the Obama White House and U.S. House Republican leaders--are now trying to work out some agreement on estate taxes.

Still Wide Disagreement
Most discussion of tax issues and the fiscal cliff affecting upper income Americans revolved around the income tax. There is disagreement about whether current income tax rates for those in the highest bracket should increase slightly or stay the same. Both sides publicly believe that current rate should be extended for middle tax brackets. Because of the focus on income taxes, real negotiation of estate taxes has been pushed to the side. That appears to be changing.

According to a recent NBC story on the situation, the parties are now trying to reach some common ground on the estate tax. The current rate is 35% on all assets over $5 million. If no agreement is reached and we go over the fiscal cliff, then the exemption level drops to $1 million at a 55% rate. This represents a significant change with very real implications for many New Yorkers. In general, Republicans oppose any change to current rates while most Democrats (including the President) propose a compromise with higher rates and a lower exemption levels than at present but not as stark as the fiscal cliff amounts. The President has proposed a 45% rate with exemptions up to $3.5 million.

One complexity in the negotiations is that there may be disagreement within the Democratic party. Some leading figures have agreed with Republicans that current rates be extended. The concern is that lowering the exemption level and increasing the rate might hurt certain groups, like family businesses and farms.

Yet, figures from the Tax Policy Center suggest that of the 3,270 families that paid the estate tax last year, less than 50 involved small businesses and farms. Instead, the collections seem to be concentrated among a certain groups, with the top 1% of earners in the country paying 80% of the total estate tax.

In any event, all families who may pass on assets over $1 million must pay careful attention to these negotiations, as changing rules may impact their long-term planning.

See Our Related Blog Posts:

Unsellable Artwork Donation Saves Millions in Estate Taxes