Death and Taxes

Nothing is certain but death and taxes, goes the old saying. But combine the two and nothing is certain but uncertainty. The new year came without Congress extending the estate tax (the House voted to extend the tax, but the Senate didn't act), so for 2010 it is gone. It's scheduled to revive at a higher rate (55% vs. 45% in 2009) and lower exemption ($1 million vs. $3.5 million in 2009). Most commentators expected Congress to extend the tax in 2010. Most commentators were wrong.

2010 marks the first year since 1916 that a person can die without an estate tax. That is making for a lot of macabre jokes about doing in a rich relative. The truth, though, is 2010 might not be such a great year to die anyway. In the Internal Revenue Code there is a provision for "stepped up basis," which means that when property passed by inheritance, the basis (amount at which the property was acquired) was stepped up to the date of death. That meant, for example, if Uncle Harry owned real estate that he purchased in 1950 for $10,000 and it is today worth $750,000, the basis to the heirs became $750,000, saving a bundle in capital gains taxes. But this provision went away with the estate tax. So now the heirs are looking at a capital gain tax on $740,000, the difference between the 1950 basis of $10,000, and today's value of $750,000 should they sell. Assuming values continue upward, that taxable gain will only get bigger.