Hillary Clinton and Donald Trump had very different positions on the estate tax during the 2016 presidential election. The media gave little attention to the estate tax during the campaign. Even so, it’s likely that President Trump will move quickly to attempt to repeal the estate tax entirely. President Trump will be aided by a Republican House and Republican Senate.
The Estate Tax Today
I previoiusly provided a detailed explanation of the estate tax. In short, when a person dies, their estate must pay a tax to the federal government. However, in practice, this tax is only paid if the estate is extraordinarily large. The first $5.45 million of an estate is exempt from the estate tax. This is often called the estate tax exemption. The federal government taxes every dollar beyond the exemption. The estate tax exemption is pegged to inflation. Consequently, it rises every year by operation of law. Very few estates are subject to the estate tax because the exemption is so high. Most states are like Nevada, which imposes no estate or gift tax.
Revenues generated by the estate and gift tax are a small portion of overall Federal tax revenues. In fiscal year 2014, the IRS collected $19.3 billion in net estate and gift tax revenues. This amount represented 0.6 percent of total net Federal tax collections in fiscal year 2014. By comparison, the highest post-World War II share of total Federal revenues represented by the estate and gift tax was 2.6 percent in fiscal year 1972.
Relatively few taxpayers are directly affected by the Federal estate and gift tax. In 2013, the most recent year for which final numbers are available, there were 2.6 million deaths in the United States, and 4,700 estate tax returns reporting some tax liability were filed. Thus, taxable estate tax returns represented approximately one-fifth of one percent of deaths in 2013. By comparison, in the mid-1970s taxable estate tax returns exceeded six percent of all deaths.
Traditionally, the estate tax is a politically polarizing topic. Generally, Republicans favor completely abolishing the estate tax. In contrast, Democrats not only want to keep the estate tax, but also lower the exemption amount.
Hillary Clinton on the Estate Tax
Yet one thing a few voters may still have a hard time accepting is Clinton’s new proposed estate tax plan, raising the estate tax up to an astounding 65%. Current law exempts estates worth $5.45 million or less, and beyond that, you pay a 40% tax. Ms. Clinton wants to reduce that exemption to $3.5 million, and to increase the rates.
Most people will never pay this, so much of the aversion is emotional. Instead of 40%, she wants a 50% rate for estates worth over $10 million per person, 55% for estates over $50 million, and 65% for estates exceeding $500 million.
Donald Trump on the Estate Tax
Donald Trump favors a complete repeal of the estate tax, like most Republicans.
The Trump Plan will repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.
Some analysts think a total repeal is a “fairly radical proposal.”
Still others are doubtful that a repeal will occur at all:
“Yes, he has the White House, the House and the Senate, but the big wild card is you need the 60-vote supermajority in the Senate,” Mr. Behrendt said.
The administration of George W. Bush, for example, couldn’t push through an estate-tax repeal in 2006 due to a failure to overcome the 60-vote hurdle. The Republican-controlled Senate, in that circumstance, fell three votes shy, with a 57-41 vote in favor of repeal. The Senate also came up short on a similar measure in 2002.
“It’s not as if the Republicans can do anything they want,” Charlie Douglas, partner and director of wealth planning at Cedar Rowe Partners, said.
The Trump Administration is expected to move quickly on a lot of issue. Given this, it will be interesting to see if the estate tax makes much news, repeal or not. It’s probably not the sexiest issue, nor is it an issue that affects many Americans.