What is the Death Tax?
The death tax (a.k.a., the federal estate tax) is a tax applied to the transfer of a person’s assets at death. It is defined by the Internal Revenue Service as “a tax on your right to transfer property at your death.”
Under current law, the tax is temporarily set at the rate of 35 percent with an exemption of $5 million. On January 1, 2013 the estate tax is set to return at a top marginal rate of 55 percent (with an additional 5% surtax for certain estates) on all assets above a $1 million exemption amount.
Often times family businesses and farms are caught in the death tax trap – if the family is forced to sell all or part of the business or farm to pay for the tax, employees and payrolls must be slashed. Additionally, customers lose a place to buy a product or service and suppliers of materials lose customers. Click here to see the history of the Death Tax
What assets are subject to Death Tax?
Everything a person has of any value counts towards the death tax exemption. This means your car, home, stocks, bonds, bank accounts all are totaled together to calculate if you owe the estate tax. Starting January 1, 2013, under current law, if your total estate is over $1 million, you will owe taxes at a 55% rate. Think about all the assets you own:
- personal property (such as a home, cars, furniture, artwork)
- business assets (property, machinery and inventory)
- investments (stocks, bonds and real estate)
Now think about how much that is worth – these days, it doesn’t take much to push you over the $1 dollar exemption, after which all additional assets are taxed at a 55% rate. It is easy to see why nearly 70% of voters want the death tax repealed permanently. The estate tax doesn’t just affect millionaires and billionaires, it affects everyday people and America’s main job creating engine – family businesses.
Even at the current $5 million exemption, family businesses and farmers are susceptible because they are “asset rich” and “cash poor” – the great majority of the value is locked in the land and equipment. If the family doesn’t have the cash on hand to pay the tax, they are forced to sell assets and possibly the entire business or farm.
How does the Death Tax work?
For any assets valued over the exemption, the people who inherit the farm, business, or property will owe the tax within nine months of the decedent’s death. For those family businesses that are forced to take out a loan to keep the business running, their tax rate becomes the tax paid, plus the interest owed on the loan.
What can you do to fight the Death Tax?
Internal Revenue Service, Estate Tax Overview, http://www.irs.gov/businesses/small/article/0,,id=164871,00.html.
Internal Revenue Service, Publication 950, Introduction to Estate and Gift Taxes, http://www.irs.gov/publications/p950/ar01.html#d0e23.