President Obama’s plan to change the nation’s inheritance tax would boost the current rate by nearly 50 percent and create a “second death tax,” according to an analysis by the Americans for Tax Reform, headed by anti-tax czar Grover Norquist.
Under the plan leaked in advance of Obama’s Tuesday State of the Union address to Congress, the president would tax inherited assets at the rate of the person making the bequest, not that of the recipient. And under the president’s new plan, the new capital gains rate would be 28 percent, nearly double the 15 percent when he took office.
How ATR figures it
Under current law, when you inherit an asset, your basis in the asset is the higher of the fair market value at the time of death or the descendant’s original basis. Almost always, the fair market value is higher.
Under the Obama proposal, when you inherit an asset, your basis will simply be the descendant’s original basis.
Example: Dad buys a house for $10,000. He dies and leaves it to you. The fair market value on the date of death is $100,000. You sell it for $120,000. Under current law, you have a capital gain of $20,000 (sales price of $120,000, less step up in basis of $100,000). Under the Obama plan, you have a capital gain of $110,000 (sales price of $120,000, less original basis of $10,000).
There are exemptions for most households, but this misses the larger point: The whole reason we have a step up in basis is because we have a death tax. If you are going to hold an estate liable for tax, you can’t then hold the estate liable for tax again when the inheritor sells it. This adds yet another redundant layer of tax on savings and investment. It’s a huge tax hike on family farms and small businesses.
It’s like a second death tax (the first one has a top tax rate of 40% and a standard deduction of $5.3 million/$10.6 million for surviving spouses). Conceivably, an accumulated capital gain could face a 40% death tax levy and then a 28% capital gains tax on what is left. Do the math, and that’s an integrated federal tax of just under 60% on inherited capital gains.
Paul Bedard, the Washington Examiner’s “Washington Secrets” columnist, can be contacted at [email protected].
Paul Bedard, the Washington Examiner’s “Washington Secrets” columnist, can be contacted at [email protected].
