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Understanding the Death Tax

Presidential candidate Donald Trump recently gave a speech announcing that he would repeal the death tax. That immediately started a media frenzy about the death tax, a tax that in reality many people never even knew existed. No matter what side of the aisle you’re on or for whom you’re voting, Trump’s speech at least provides an opening to discuss what the death tax is.

What is the Death Tax

The death tax, often called the estate tax, is simple in principle. When someone dies, the value of their estate is taxed by the IRS. Of course, whatever is taxed is money that doesn’t go to the deceased’s beneficiaries. The death tax generally applies to all assets of the deceased, including stocks, bonds, retirement accounts, or small businesses.

The death tax doesn’t affect everyone; the IRS only applies it where the estate has a value of over $5.45 million. According to a Congressional report, in 2013, only 4,700 estates reported tax liability under the estate tax—an obviously very low number compared the number of people who actually died in 2013. Some estimate that only households that fall within the 95th-99th percentile of incomes will ever be affected by the tax.

The threshold number can and does change. In fact, as early as 2003, the value of an estate only had to be $1 million to be subject to the tax. That year, the number of estates subject to the tax was 73,000.

Arguments on Both Sides

Many people are critical of both imposing and repealing the estate tax. On the one hand, many people see the estate tax as double taxation. Many of the assets and income we acquire during our lifetime are taxed as income by the federal or state government. Thus, taxing them again when we die is seen as the government double-dipping into the same pot.

On the other hand, those in favor of the tax look at the high income threshold, and see nothing wrong with taxing those who can most afford it. And, because the people “paying” the tax are the deceased’s beneficiaries—people who, it is perceived, are inheriting the assets without actually “earning” them—there should be nothing wrong with imposing the tax.

Of course, good estate planning can minimize the effects of the estate tax on an estate, regardless of what the law says about the tax. In some ways, those who argue that it doesn’t matter what the estate tax is may be correct, given the many legal tools that can be used to protect assets that are passed on as an inheritance.

That may actually be why the numbers of returns that paid the tax last year was so low. There are likely more than 4,700 estates that meet the threshold number. But the reason why there were so few estates subject to, and paying taxes under, the death tax is likely because of smart advance asset tax planning.

Maximize your assets and protect them from creditors and from excess taxation. Contact Tampa business, asset and probate attorney David Toback to discuss a comprehensive personal and business tax and estate plan.

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