Freeze the 2009 estate tax law

Tax was allowed to expire

Updated: Wednesday, February 17th, 2010 | By Lukas Pleva

It's been nearly four months since our last update on President Barack Obama's campaign promise to freeze the 2009 estate tax law, which exempts the first $3.5 million of an estate and has a top rate of 45 percent. At the time, we wrote that it is widely expected that Congress will freeze the tax, and thereby confirm Benjamin Franklin's famous adage that only two things in life are certain: death and taxes. Gridlocked over health care and financial regulation reform, however, Congress has let the estate tax expire, potentially making 2010 a very promising year for those with wealthy older relatives.

As we wrote in our first update, it all started in 2001, when Congress approved measures to gradually increase the tax exemption while slashing the top rate. At the time, estates valued at $675,000 or higher were subject to a tax of up to 55 percent. In 2009, the threshold was $3.5 million per individual (or $7 million per couple), with a 45 percent tax rate. In 2011, all estates worth more than $1 million will be taxed at 55 percent. In 2010, unless Congress takes measures to extend the 2009 law, the tax would temporarily disappear for a year.

On Dec. 3, 2009, the House of Representatives passed a law to permanently extend the 2009 rates. Sponsored by Rep. Earl Pomeroy, D-N.D., the legislation passed 225-200, mostly along party lines, with opposition coming mostly from Republicans, who widely support a repeal of what is often referred to as the "death tax." Overwhelmed by contentious debate on health care reform, however, the Senate did not place the bill on the legislative calendar until Dec. 24, 2009, and subsequently failed to take a vote. With no congressional action in the days between Christmas and the Jan. 1, 2010, deadline, the estate tax was allowed to expire.

The $3.5 million dollar question is whether Congress will move to retroactively enact the tax in 2010. Senate Finance Committee Max Baucus said he'll work to do just that, but there is debate in legal circles as to whether the retroactive law would survive what would surely become a constitutional challenge. According to Paul Caron, associate dean at the University of Cincinnati law school, the Supreme Court wrote in 1994 that a retroactive tax law is constitutional, as long as it has a rational purpose, is not arbitrary, and is enacted without excessive delay. Bob Williams from the Tax Policy Center wrote on his blog that he has "no idea whether such (retroactive) legislation could survive expected cries of 'Foul!' and the accompanying lawsuits," but nevertheless urged his readers to avoid making any hasty life-and-death decisions.

Because Congress could technically always go back and retroactively reinstate the tax, President Obama still has some time to uphold his promise. Until we see some form of movement toward a compromise or a retroactive reinstatement, however, we are knocking this one down to Stalled.

Sources: USA Today, Estate tax set to expire Thursday, by Kevin McCoy, Dec. 31, 2009.

The Wall Street Journal, Rich Cling to Life to Beat Tax Man, by Laura Saunders, Dec. 30, 2009.

Tax Policy Center, Estate Tax Whiplash, by Bob Williams, Dec. 18, 2009.

OMB Watch, Estate Tax Reform Bill Passes House, Moves to Senate, Dec. 8, 2009.

Reuters, Big tax issues pending in U.S. Congress, Feb. 5, 2010.

Thomas Library of Congress, H.R.4154 Index Page, Accessed Feb. 12, 2010.

Obama budget assumes estate tax stays the same

Updated: Monday, October 5th, 2009 | By Angie Drobnic Holan

The estate tax — sometimes referred to as an inheritance tax or derisively as a death tax — is one of the quirkiest taxes on the books. Here's why: Right now, the estate tax exempts the first $3.5 million and has a top rate of 45 percent. That rate, though, is set to expire at the end of 2009. In 2010, there will be no estate tax. (We really hope nobody is tempted to off their wealthy relatives in 2010.) In 2011, the estate tax comes roaring back, at an even higher rate than in 2009.

The reason for this strangeness is that many of the tax cuts implemented by President George W. Bush will expire in 2011. It's widely expected that Congress will take action this year to change the law for 2010 and 2011.

President Barack Obama has proposed leaving the 2009 estate tax with its top rate of 45 percent in place going forward. Tax documents from the Obama administration incorporate that change into budget projects.

Congress still needs to act to change the estate tax law, and that hasn't happened yet. It seems likely, however, that it will happen before the end of 2009 when the tax expires. We'll be watching for that and meanwhile rate this promise In the Works.

Sources:U.S. Treasury Department, General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals , May 2009

Tax Policy Center, Tax Proposals in the 2010 budget , accessed Oct. 2, 2009

Tax Policy Center, TaxVox Policy Blog posts on the estate tax , accessed Oct. 2, 2009