Republicans, and 56 percent of Americans, hail the estate tax provision of last December’s tax bill as a boost to liberty and a blow to an entitled government, according the New York Times. Democrats see the provision as a moral outrage that will cost 14 billion over the next two years. However it is viewed, the federal estate tax is irrelevant to most estates.
Estate Tax Explained, Sort-of
Basically, with an estate tax, the federal government gets a cut of the estate before heirs. Expired tax laws led to uncertainty in 2010, during which the estate tax was seemingly no more. Congress remedied their inaction of 2009 with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, afar-reaching law that tackled, among other issues, the reinstatement of the estate tax.
In a partisan compromise, Congress increased the size of estates affected by the new measure from $3.5 million to $5 million dollars. It’s hard to say how many of Michigan’s nearly 200,000 millionaires fall into that enviable echelon. According to Alan Rothschild of the American Bar Association, less than half of a percent of 2011 decedents in Americawill be subject to the estate tax, a far cry from the 10.5 percent of estates that paid the tax in 1977.
Michigan’s Estate (Non)Tax
Michigan’s estate tax became obsolete when the federal estate tax was changed in 2005. Prior to 2005, the federal estate tax allowed an exemption for state taxes that the estate owed. Essentially, if 45 percent of the taxable estate was due for federal taxes, the state of Michiganwould collect 16 percent of that 45 percent, with the remaining going to the federal government. In this structure, the estate paid the same amount in taxes; it was the federal government that wound up with less. In 2005, the federal estate no longer allowed a state tax exemption, nullifying Michigan’s estate tax.
Estate Tax Versus Estate Planning
It’s no wonder professionals consider the estate tax the most confusing part of the tax code. Regardless of its dizzying modifications and complex exemption structure, the federal estate tax is irrelevant to most Americans. Estate planning, though, is not irrelevant. Receiving far less press is the vulnerabilities an estate has against creditors or even Medicare. While 56 percent of Americans are against a tax inconsequential to their own estates, about that many have no estate plan in place whatsoever, according to Forbes.