The death tax is a term that’s given to certain estate taxes or inheritance taxes. In the United States, it is officially defined as a tax on the ability to transfer property to heirs at a person’s death. The laws regarding this tax change from time to time, but in general there is a $1 million to $5 million exemption on property with marginal rates above the exemption amount being 35-55%. Anything that has value is subject to this tax. Here are the key points to consider when evaluating the pros and cons of a death tax.
The Pros of a Death Tax
1. The amount of the tax is charged the same to everyone.
The most that is owed on a death tax is 55%. This is true no matter what a person’s tax bracket may be. Although the tax itself is progressive based on the overall value of the estate, it does not consider the current tax brackets of those who are receiving the inheritance.
2. The number of individuals who will face the estate tax is rather small.
Only 0.2% of all estates in the US actually qualify for the estate tax. This means only 2 out of every 1,000 Americans who die have an estate that is valuable enough to be taxed. Even for those who do fall into this small minority, the taxable estates still only create a payment that is less than 1/6 the actual value of the transfer.
3. Virtually no businesses pay the death tax upon transfer.
In 2013 figures, just 20 businesses and small farms in the United States were issued a notice that they qualified for the death tax. When the amount of the tax was calculated, it was determined that the average value of the taxation was under 6%. Options have also been instituted to make this transfer easier if the death tax occurs because tax payments can now be spread out over a 15 year period with low interest rates to avoid liquidity restraints.
4. The estates that are worth more than $5 million have an average of 55% of net worth that has never been taxed.
Many of the assets and overall value that is being taxed with the death tax are being taxed for the first time. It’s not like having a Roth IRA that is funded with post-tax dollars that would then get taxed a second time upon withdrawal. Most of what gets taxed in a death tax are unrealized capital gains for the estate.
The Cons of a Death Tax
1. It taxes assets at the same rate it taxes liquid assets.
Many Americans have their value locked up in land and other asset rich components. A $1 million piece of property gets taxed the same as $1 million in cash. If the death tax can’t be paid on those assets by those who are inheriting them, then the asset must be sold so the taxes can be paid and that effectively eliminates the purpose of inheritance in the first place.
2. It affects the lower class more than the upper class.
Those who are wealthy pay a lower overall portion of their income to the death tax than those in the lower wealth brackets. Although the percentage of the tax is the same for everyone based on the value of the transfer, paying 35% on an inheritance is a lot easier to do when someone already has $1 million instead of just $100,000 in the bank.
3. It is based on the current value of the property.
The death tax must be paid by those who receive the transfer within 9 months of receiving the assets. Instead of the transfer being based on what may have been paid for the property, it is based on the current valuation of it. If the individual paid $25k for land that is now considered to be worth $250k, it’s the latter value that gets taxed if the estate qualified.
4. The government can get you three times on this tax.
In the US, there are taxes that could have been paid upon the initial purchase of a tangible asset. Then the death tax can kick in and tax that asset again when it is transferred. A third profit marker occurs when someone takes out a government-backed loan to pay for the taxes because they pay interest to the government on the taxes that they just paid from the transfer.
The pros and cons of a death tax show that it can be an important source of revenue for the government. It also shows that there are legitimate reasons why families oppose this tax and want it abolished. By evaluating these key points, you can decide whether you support the pros or the cons of continuing this 100+ year tradition.
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