The federal estate tax appears to be dead in 2010, but business owners shouldn't start counting their heirs' saved dollars and cents just yet.
The phasing out of the estate tax this year was approved in 2001 during President George Bush's tenure. And the big surprise is that it will return in 2011 with a top tax rate of 55 percent and a $1 million exemption. In fact, it could even return in 2010.
The phase-out and the 2011 return of the estate tax was a fluke built into the tax reform legislation in 2001 as a way to win support in Congress for President Bush's $1.35 trillion tax cut plan. All of the tax breaks are scheduled to expire in 2011.
Last year, congressional Democrats vowed to reverse the one-year repeal in 2010, but they failed to take action on the extension of the tax before it was phased out at the beginning of this year.
Now many in Congress are expecting lawmakers to act this spring, and possibly make the tax retroactive back to Jan. 1, 2010. Democrats and Republicans are trying to find a compromise that would extend the tax in 2010 but reduce rates and increase the exemptions for individuals and couples. In 2009, the estate tax had a top rate of 45 percent of property and other assets, with a $3.5 million exemption for individuals and $7 million for couples.
The U.S. Senate Finance Committee is looking to reverse the repeal in the coming weeks, and President Obama is expected to support its reinstatement. During the campaign in 2008, the President supported a $3.5 million exemption for estates ($7 million for couples), and the tax would be 45 percent for estates.
The estate tax has always been a particularly thorny issue for small business owners because it is fairly easy to have property and equipment that exceeds the exemption. Business owners have worried that because much of the value of their business is locked into property and equipment, anyone inheriting the business would have to sell off some or all of those assets to be able to pay the tax.
The Joint Economic Committee in Congress estimated in 2006 that about 37,000 estates that included small businesses had to pay the tax between 1995 and 2004. The Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, projected in 2008 that only 80 estates with small-business assets would be required to pay the tax in 2009.
There are ways to guard against having to sell a business to pay the estate tax. Provisions in the tax law allow new owners who have inherited the business to continue operations by exercising certain deduction and exemption clauses and by spreading the tax payments out over a long period of time.
