If no new laws are passed, income tax is going to go up next year. The highest tax bracket will see their rates rise from 35% to 39.6%. The estate tax, however, could see a jump much larger than 4.6% when the Bush tax cuts expire. The future of the estate tax is anything but certain at the moment. The Senate is divided and no one faction has the votes necessary, currently, to make their proposal a reality.
Right now there is no estate tax. The Bush tax cuts gradually lowered the estate tax over the past decade and on January 1, 2010 it did away with the estate tax entirely, replacing some of the lost revenue with changes to the capital gains tax. At the end of this year, however, the tax cuts are set to expire and when they do the estate tax will come back with a vengeance, at a rate of 55% in the top bracket, with the first $1 million of an estate exempt from the estate tax.
In the Senate, three different approaches to the estate tax have been proposed. At one end of the spectrum, Senator Jim DeMint (R-SC) has advocated repealing the estate tax permanently. Senate Majority Leader Harry Reid (D-NV) proposes it return at a rate of 45% in the top bracket with a universal exemption of $3.5 million. Midway between these two, a bipartisan group of Senators has proposed a top rate of 35% with an exemption of $5 million. None of these proposals currently has the 60 votes likely necessary to move it forward.
This logjam in the Senate leaves the future of the estate tax uncertain. It may also derail progress on income tax, capital gains tax, and the other taxes affected by the end of the Bush tax cuts. The estate tax has historically been a very difficult issue in Congress. Consensus is rare and opposing parties tend to hold to their views firmly. Inability to reach a compromise on estate tax could stall legislation addressing other tax concerns.
For more information, or for help with other tax issues, contact the Chicago tax lawyers at Horowitz & Weinstein.