Jonathan Chait

The Taxman Cometh

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Last week, USA Today published a story about all the "ordinary folks" who might get hit with the estate tax.

A $1 million exemption would affect a lot of families that are well out of Steinbrenner's league. "You take a home, an IRA or 401(k) retirement account, some other savings and you get to $1 million pretty easily," says Richard Behrendt, senior estate planner for Robert W. Baird and a former IRS attorney.

Families who live in areas with high property values are particularly vulnerable, says Clint Stretch, tax principal for Deloitte Tax who lives outside Washington, D.C. "People in my neighborhood bought a house for $32,000 in the '60s, and now it's worth $1 million," he says. "If they've got anything else, they would be paying an estate tax."

It's silly to pretend that people "get to $1 million pretty easily." In 2003, the last time the threshold was set at $1 million, only 1.24% of estates were eligible - the 98th percentile of all American families. Last year, under the new threshold of $3.5 million, that number went down to 0.3%. To help put this in perspective, the height of the top 0.3% of American males is 6'7", or the median height of an NBA player. Only 1.8% of those estates fall under the category of "farms or small businesses." Should the threshold revert next year, the Center on Budget and Policy Priorities projects that only 44,000 estates will pay any estate tax.

Not only that, but, in Stretch's example, if you have "anything else," your heirs would only pay tax on the anything else. That is, a $1.1 million estate would be taxes as $100,000 -- even assuming zero estate planning, which is unrealistic. Indeed, fewer than half of estates that file estate tax returns actually pay estate taxes.

Finally, an amusing coincidence at the end: 

As repeal of the estate tax loomed at the end of 2009, wealthy families had an incentive to keep ailing parents or grandparents alive until Jan. 1. This year, in what sounds like an episode of Law & Order, heirs stand to benefit if wealthy benefactors die before midnight on Dec. 31.

Not only does it sound like a Law & Order episode, it was a Law & Order episode.

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