Lecture15b.ppt

Lecture15b.ppt - Lecture15GiftandEstate Taxation...

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    Lecture 15  Gift and Estate  Taxation
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    Outline of Lecture Description of current tax law Distributional effects of the tax Likely behavioral responses Efficiency effects of the tax Equity effects of the tax Implications for tax policy depend on explanation for bequests
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    Current law: Estate tax Exempt amount now equal to $2 million dollars per decedent Unlimited transfers to spouse and to charity Statutory tax rates range from 18% to 45% Reduced valuation and deferred payment on businesses and farms kept in operation for at least ten years after death of decedent
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    Current law: Gift tax Any gifts from one person to another in a year of under $12,000 exempt from tax, as are any gifts to cover tuition and medical payments or free provision of services Larger gifts reduce exemption under the estate tax, so are implicitly taxable if total gifts and bequests above exempt amount Tax paid on gifts equals Same statutory tax rate as for estates, but lower effective tax rate 1 G τ +
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    Other important provisions Prior to 2002, full credit for any estate taxes paid to state governments Now, only receive a deduction for estate taxes paid to state governments Tax competition has virtually eliminated state estate taxes, since rich retirees can easily change their legal residence in response to differences in estate tax rates
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    Other important provisions Write-up of basis for capital gains at death Example: Assume Betty purchased a security for $100 back in 1960 which is now worth $2,100 If she sells it just prior to dying, she owes capital gains taxes of $300, given the 15% capital gains tax rate If she gives it as a gift to her kids, the basis is still $100, so they owe $300 (plus tax on subsequent gains) when they sell it If she leaves it as part of her estate, the basis jumps to $2,100, so no taxes are owed on the $2,000 in gains Assets with large capital gains a major part of most estates
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    Scheduled changes in estate and gift  taxes Exemptions become unlimited in 2010 But exemption reduced to $1 million in 2011 Starting in 2010, recipients of assets with capital gains will have a basis equal to the original purchase price, not the market value when they received it So the future of the estate tax very much under debate
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Lecture15b.ppt - Lecture15GiftandEstate Taxation...

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