Estate tax applies to untaxed wealth

Laura Davis Patterson

Posted: Monday, September 19, 2005

The column by Ed Feulner (Forum, "Death tax unfair to families," Sept. 5) uses the common marketing technique of calling the estate tax the "death tax," and arguing it should be eliminated because the heirs of all who die will have to pay the tax. This is not true, and I am sure Feulner knows it.

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The estate tax does not apply to most of us. Currently an estate of less than $1.5 millions is excluded from the estate tax. That will rise to $2 million in 2006 and to $3.5 million in 2009. If Congress does not act to keep these limits, the amount will revert to the smaller amount that was excluded in 2002. The reversion provision was included to hide the true cost of raising the limits on a taxable estate. Congress is not likely to allow the reversion to happen.

Heirs to an estate get a cost basis in inherited property that is equal to the fair market value at the date of death. If a person bought property in 1940 for $100 an acre, and sells it in 2005 for $25,000 an acre, the difference between $100 an acre and $25,000 an acre is taxable income. This gain is taxed at a lower rate than "earned" income (i.e., money made by working), but it is taxable income nonetheless.

If the same person dies in 2005 still owning the property, the heirs have a cost basis of $25,000 an acre. They can sell the property with no tax consequences. The person who has plenty of income without having to sell the property gets to pass the gain tax-free. The person who needs the money to live has to pay tax on the gain.

The estate tax ensures that some tax is paid when wealth that has never been taxed is passed to something other than a charitable cause. There might be some valid arguments for allowing this untaxed wealth to pass without paying tax, but Feulner does not make them. In fact, he does not even admit he is talking about taxing wealth that has never been taxed.

Laura Davis Patterson

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