US House Votes to Extend Inheritance Tax

CNN Money is reporting the US House of Representatives has voted to extend the inheritance tax exclusion of $3.5 million, plus the first $1 million in gifts . According to the House Bill, the $3.5 million exclusion will be now become permanent. The tax will be 45% on the value of the estates above $3.5 million. The current law and exclusion was due to be completely repealed in 2010, in effect having no estate tax for deaths during the 2010 fiscal year and then revert to $1 million in in 2011. The passing of the bill has booth conservatives and liberal members of Congress concerned. The conservatives stating the lower exclusion and high rate of 45% harms families and business owners, while liberals believe the tax is not high enough or the exclusion is too high. The vote passed 225-200 in the house.

Even though the House has passed the bill it may still not be the final version. The bill, to become law now has to be approved in the US Senate. According to reports there is potential for additional changes in rates or the exclusion as well as issues based on when and if the the new legislation becomes law. If it is not passed unitl later in 2010, it may or may not become retroactive to Jan 1, 2010.  Also, state inheritance and estate taxes remain as well.

All very interesting and applicable to personal property appraisers, but keep in mind the final product or law has yet to be determined. 

CNN Money states

That means the first $3.5 million of a person's estate - and the first $1 million of gifts - would be exempt from the tax. And the highest rate applied to the taxable portion of an estate would be 45%.

Those levels don't snag a lot of folks. Of the roughly 2.5 million Americans expected to die in 2009, only 5,500 - or 0.25% - will have estates large enough to be taxable, the Tax Policy Center estimates.

The House bill would increase the deficit by $234 billion over 10 years, according to the Joint Committee on Taxation. That's because even though current law would repeal the tax for one year, it reinstates it by 2011 at an exemption level of just $1 million, which would mean an increasing number of estates would be subject to the tax as years went by.

The House bill now moves to the Senate, but its prospects there are less clear.

For one thing, there are competing ideas in the upper chamber for what a permanent estate tax should look like. One leading bipartisan proposal in the Senate would set the exemption amount at $5 million and set the top estate tax rate at 35%.

Most Republicans advocate for the lowest estate tax possible, but Democrats "are not of one mind on this," said Clint Stretch, managing principal of tax policy at Deloitte Tax.

So there is a chance that a lower estate tax could garner sufficient support when the Senate takes up the issue.

Practically speaking, however, it's unlikely to do so before the end of the year. With health care dominating the day, it will be hard to get serious legislation in edgewise.

But don't be fooled: The Senate is likely to rally around a short-term fix and pass a one-year extension of the tax at 2009 levels by Dec. 31.

"The Senate is a wondrous place. The impossible becomes possible when it has to," Stretch said.

Here's why: If Congress waits until next year to temporarily extend the tax, making it retroactive to Jan. 1, it creates a lot of headaches.

Consider the person who makes a large gift in early 2010 before lawmakers act. He would make the gift assuming that it has no tax consequences because, in fact, that would be the case when the gift is made.

But if lawmakers then turn around and restore the tax, making it retroactive to Jan. 1, the gift could be retroactively subject to tax or reduce the gift-giver's $3.5 million lifetime exemption.

To read the full CNN Money report, click HERE.