The uncertainty of taxes when it comes to death
Although there is a great deal of truth in Benjamin Franklin’s oft-quoted maxim that the only certainties in life are death and taxes, the timing of death and the amount of taxes owed are not certain, observed Joyce Beebe, a fellow at Rice University’s Center for Public Finance.
“The Tax Cuts and Jobs Act of 2017 leaves the federal wealth transfer tax system in place, but temporarily doubles the exclusion amount for estate and gift taxes to $11.18 million per individual or $22.36 million per married couple until the end of 2025,” she said. “In 2026, absent congressional action, the base exclusion amount will revert to $5 million, indexed for inflation.”
The Joint Committee estimated that the doubling of the exclusion would result in a 60 percent reduction in taxable estate tax returns, according to Beebe. ”Over the next 10 years, this provision would reduce federal tax revenue by $83 billion, which encompasses a reduction of $8 billion to $10 billion on an annual basis,” she said.
Researchers differ on the reason for the lower revenue, Beebe indicated. “Some say that high exclusion amounts as well as the unlimited spousal and charitable contribution deductions are the main causes, while others say it is a consequence of extensive and effective planning, making the estate tax a ‘voluntary tax.’”
Since 2001, states have been moving away from the estate tax as a stable revenue source, she observed. “Many states either repealed the tax or increased the exclusion amounts. In 2018, only 12 states plus Washington, D.C., levy estate taxes, all with different structures from the federal tax,” she said. “New Jersey and Delaware dropped their estate taxes within the last year, even though both have budget shortfalls. State officials stated that a major reason for eliminating the estate tax was tax competition – they believe that if wealthy senior citizens do not move to other states to avoid paying state estate taxes, the state may eventually collect more revenue from state personal income taxes, property taxes or sales taxes to recoup the lost estate tax revenue.”
As a result of the TCJA, many states may feel pressure to raise their exclusion levels or repeal estate taxes altogether.
“With a lower federal estate tax to deduct against a state estate tax, the real cost of a state estate tax is higher for residents,” Beebe said. “States may need to balance the costs of managing the system, the volatility of revenue and the amount of revenue collected to make informed decisions about whether to keep the estate tax. Additionally, if the federal estate tax is repealed in the future, states would have to bear the full administrative burden of collecting estate taxes themselves – they would no longer be able to rely on the IRS to issue guidance, regulations and private letter rulings, which would further increase the costs of collection.”
Given the current political environment, government deficit levels, the recent increased exclusion amount in 2017 and perceived wealth concentration in the U.S., a targeted full repeal of the federal estate tax is unlikely in the next few years, Beebe believes.
“However, a reversal to the pre-TCJA low exclusion level is equally unlikely, at least until the next presidential election,” she said. “There was significant momentum to repeal the federal estate tax during the 2016 presidential campaign and throughout the tax reform discussion in 2017, but it was ultimately not adopted in the TCJA. The TCJA relied on the budget reconciliation to pass the legislation, a process that would be similarly challenging if not more difficult to accomplish in the next two years. After 2020, a more likely outcome is that either the increased exclusion will be made permanent, or the exclusion amount will be adjusted prior to the 2026 sunset of the bill. Stakeholders on both sides will continue to advocate for changes,” she said. “But if history is any guide, changes to the exclusion amount – either permanency or a reduction – are unlikely to happen until the dawn of 2026 is upon us.”
The charitable deduction, along with the spousal deduction, is an unlimited deduction for the estate tax, Beebe noted.
“That’s why charities hope the estate tax is here to stay,” she said. “If the estate tax is repealed, they won’t have that source of revenue. It’s a pretty emotional issue. The amount of attention the estate tax gets is seriously disproportionate to the amount of revenue it produces – less than 1 percent of federal revenue is derived from it.”