The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Capital Gains Tax

Prior to December 31, 2009, the basis of inherited property (or property acquired by way of substitutes for testamentary transfers) was usually the fair market value of the property on the date of the decedent’s death (or, six months after the decedent’s death if the executor elects to value the assets included in the gross estate on the alternate valuation date of six months after the decedent’s death due to the aggregate value of the assets being less at that time). The decedent is not required to recognize gain on the transfer of property at death, so any appreciation that occurred during the decedent’s life is exempted from tax. This is what is referred to as a tax-free step-up in basis.

For many years prior to the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), tax reformers had been objecting to the tax-free step-up in basis, arguing that either the appreciation on property transferred at death be taxed, or that the survivors take the property with a carryover basis as under Title 26, Section 1015 of the United States Code, which covers the basis of property acquired by gifts and transfers in trust, and generally provides that the basis would be the same as it would be in the hands of the donor.

With the passage of EGTRRA came carryover basis provisions. Title V, Subtitle E, Section 541 of EGTRRA terminates the step-up in basis at death for decedents dying after December 31, 2009. There are, however, some major credits and exemptions that will prevent a number of people from being affected by the provisions. The assets of every decedent’s estate will be eligible for a $1,300,000 increase in basis, and assets passing to the surviving spouse of a decedent will be eligible for an additional $3,000,000 increase in basis. H.R.4154. - Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, recently passed by the House of Representatives, would repeal the carryover provisions of EGTRRA. Although beneficiaries won’t be paying any federal estate taxes in 2010, some may be paying capital gains taxes instead.

Economic Growth and Tax Relief Reconciliation Act of 2001

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Congress and the Federal Estate Tax

There has been much speculation in the past year as to whether Congress would act to provide some clarity on the federal estate tax. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) affected a number of areas dealing with tax, including estate, gift, and generation-skipping transfer taxes, among many others. Pursuant to EGTRRA, the tax exemption amount would increase from $675,000 in the year 2001, to $1,000,000 in the years 2002 and 2003, to $1,500,000 in the years 2004 and 2005, to $2,000,000 in the years 2006, 2007, and 2008, and $3,500,000 in the year 2009, until the year 2010, when the federal estate tax would be repealed for that year and reinstated with a tax exemption amount of $1,000,000 in the year 2011, unless Congress acted before then. It becomes difficult for some to engage in any long-term planning when the tax law changes every year.

As of this writing, in December of 2009, the unified tax credit exemption amount is $3,500,000 and taxes would have to be paid on anything over that amount if a person dies this year. If a person dies in 2010, their beneficiaries will not have to pay any taxes on the deceased’s estate. In 2011, the unified tax credit exemption amount goes back to $1,000,000, and estate taxes will be due on estates worth more than $1,000,000 dollars.

On December 3, 2009, the House of Representatives passed H.R.4154 – Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009. This Act repeals provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, eliminating the tax on estates and generation-skipping transfers and the step-up in basis provisions for property acquired from a decedent for estates of decedents dying after 2009. The estate and gift tax provisions in effect in 2009 would be retained. It also amends the Internal Revenue Code to establish a permanent exclusion amount of $3,500,000, and a maximum tax rate of 45% for decedents dying, and gifts made, after December 31, 2009. (The gift tax exemption amount would remain at $1,000,000.) Under H.R.4154, only a small percentage of Americans would need to be concerned with paying federal estate tax. Although the Senate has yet to vote, the passage of this bill by the House of Representatives is a step toward clearing up some of the uncertainty surrounding estate and gift taxes.

Mentioned earlier, an issue with which to be concerned is the elimination of the step-up basis at death under The Economic Growth and Tax Relief Reconciliation Act of 2001, which will be the subject of my next post.

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Lawyers On Call - Free Legal Advice for Arizonans

On January 5, 2010, the topic for Lawyers On Call will be foreclosures and evictions. See the State Bar of Arizona web site for more information.

State Bar of Arizona

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