I read an interesting article in today's (Sunday, January 10, 2010) San Francisco Chronicle by Kathleen Pender. It is about the expiration of the Estate Tax that expired at the beginning of this year because of the failure of Congress to act on it by the end of 2009. It is a temporary suspension because, if Congress fails to do anything, it will reappear in 2011 in a different guise. This failure leaves many people, attorneys and accountants included, in a huge state of confusion.
In 2009 $3.5 million was exempt from the estate tax, and the top rate for taxes above that amount was 45%. In 2010 there is no estate tax for heirs of folks who die this year, and in 2011 the exemption will be only $1 million with a top estate tax rate of 55%.
Not having to pay any estate tax this year may sound good, but there also will be no tax break based on the step up basis. This means that the heirs could end up paying considerably more in capital gains taxes when the properties they inherit are sold.
In past years, and again next year, capital gains taxes will be based on a property's value as of the date of death. When the property was sold capital gains would be calculated on the difference between what it sold for and what its value was as of the date of the person's death. This is the "step up" basis.
So, for example, a home that was purchased for $100,000 several years ago, and that is its cost basis, had a value of $1,500,000 as of the date of death, and is later sold for $1,550,000. Capital gains would be $50,000, the difference between the sale price and the value at the date of death, and capital gains tax would be figured on that amount as a result of the step up basis. In the San Francisco Bay Area of California where I do appraisals, this scenario is not uncommon
In 2010, however (unless Congress acts to change things), the capital gains would be $1,450,000, the difference between the sale price and the original cost, and the heirs would be taxed on that amount. That is because as it is now there is no step up basis, and makes tax planning for attorneys and accountants extremely vexing.
To read the complete article by Ms. Pender, you can click onto the following link, and you might also want to make an appointment with your accountant or attorney to try to figure out what, or what not, to do. Good luck.
Link to "Death of Estate Tax Leaves Some Heirs Worse Off:" http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/01/10/BULP1BFGS6.DTL
Thank you, we'll be in touch!