With all the talk in the news about income tax increases and cuts, you'd think there would be more discussion about a pending estate tax bombshell. But the prospect of significantly higher estate taxes in 2013 doesn't appear to be a major concern on the Hill. In fact, Senate Democrats recently dropped language providing estate tax relief from its latest tax proposal.
The loss of the estate tax lifeline can be attributed to political maneuvering in our nation's capital as both parties continue to position themselves for the upcoming election.
The lightening rod is the scheduled expiration of the so-called "Bush tax cuts" in 2013. Unless Congress enacts new legislation, the maximum tax rate on net long-term capital will increase from 15 percent to 20 percent, while dividends currently taxed at no more than 15 percent will be taxed at ordinary income tax rates. The highest ordinary income tax rate, which is 35 percent in 2012, will reach 39.6 percent in 2013.
The Senate proposal backed by President Obama would extend the Bush tax cuts through 2013 for 98 percent of households, while letting the tax reductions expire on individuals' income above $200,000 and married couples' income of more than $250,000. It's believed that Democrats will have the majority needed, by the slightest of margins, to pass the legislation in the Senate (although it's surely doomed in the House). But a handful of Senate Democrats, including Mark Pryor of Arkansas and Kay Hagan of North Carolina, had expressed reservations due to the estate tax provisions. Hence, they were booted from the bill.
In addition to related provisions, the current $5 million estate exemption (indexed to $5.12 million for 2012) and top 35 percent estate tax rate are set to expire in 2013, to be replaced by a $1 million exemption and a top 55 percent rate. The initial Senate proposal would have created a $3.5 million exemption and a top 45 percent rate.
Neither side wants to take the blame for raising estate taxes for the middle class. It doesn't seem likely that Congress would allow higher estate taxes to take effect, but stranger things have happened. After all, most experts didn't expect the estate tax to be repealed, but it did vanish completely in 2010 before being reinstated. Stay tuned for more to come.