estate_tax_myths - 820 First Street NE, Suite 510...

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Revised June 13, 2006 THE ESTATE TAX: MYTHS AND REALITIES The estate tax has been an important source of federal revenue for nearly a century. It also encourages billions of dollars in charitable donations each year ( 06tax.htm ), since donations substantially reduce the tax on large estates. Despite these benefits, a number of misconceptions continue to surround the tax. Myth 1: Repealing the estate tax wouldn’t significantly worsen the deficit because the tax doesn’t raise much revenue. Reality: Repealing the estate tax would add trillions of dollars to future deficits. Permanently repealing the estate tax would cost roughly $1 trillion over the first ten years of extension, 2012-2021. This cost includes $808 billion in lost revenue and $222 billion in increased interest payments on the national debt. (The official ten-year cost estimate is much lower: $387 billion. But that estimate is misleading because it covers an earlier ten-year period, 2007-2016, that captures only the cost of five years of extending repeal.) ( ) Given the current fiscal situation — and, more importantly, the looming budgetary challenges posed by the baby boomers’ retirement — it would be extremely unwise for the federal government to forgo such large revenues. Myth 2: The estate tax forces estates to turn over half of their assets to the government. Reality: The few estates that pay any estate tax at all generally pay less than 20 percent of the value of their estate in taxes. Roughly 99 percent of estates pay no estate tax at all. Among the few estates that do owe taxes, the "effective" tax rate — that is, the percentage of the estate that is paid in taxes — averaged about 20 percent in 2004, according to the IRS, far below the top estate tax rate of 49 percent that these estates faced. ( 06tax.htm ) 820 First Street NE, Suite 510 Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 [email protected]
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2 Why is the effective tax rate so much lower than the top tax rate? Estate taxes are due only on the portion of an estate’s value that exceeds the exemption level, not on the entire estate. For example, at today’s $2.0 million exemption level, a $2.5 million estate would owe estate taxes on $500,000 at most. In addition, a large portion of the estate’s remaining value can be shielded from taxation through available deductions (for charitable bequests and state estate taxes paid, for instance). It’s also worth noting that the effective estate tax rate will fall below 20 percent over the next few years, as the exemption level rises and the top estate tax rate declines. Myth 3:
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This note was uploaded on 09/09/2011 for the course TAX 6845 taught by Professor Kelliher,c during the Fall '08 term at University of Central Florida.

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estate_tax_myths - 820 First Street NE, Suite 510...

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