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By Staff | Feb 26, 2010

Republicans got their wish, at least for 2010. There is no estate tax. 15,000 estates above $3.5 ($7 million per couple), that would have owed something in estate tax, won’t, as the estate tax lapsed for 2010.

Be careful what you wish for. Now, by letting the estate tax law expire, instead, 50,000 estates will owe taxes because the “step up basis” provision also lapsed so now owe capital gains taxes.

Last year, estates were able to “step up” their basis when valuing property such as farmland which would reduce their capital gains liability in the future if the property was ever sold.

With the expiration of estate tax law for 2010, the “step up” basis provision expired, too. ISU tax expert Neil Harl said, “Getting a new tax basis at death is vastly more important than action on federal estate taxes. That provision affects everyone up and down the income scale while estate taxes have largely affected only a handful of wealthy individuals up to now.

“But the new carryover basis treatment has not gotten the attention it deserved. When Congress passed this provision in 2001, there probably weren’t five people in Congress who understood how important tax basis was.

“Raised animals have zero tax basis, so don’t die owning a cattle herd. Inherited property no longer received a step up in tax basis, essentially forgiving all the capital gains that occurred during the decedent’s lifetime.”

The “step up basis” provision is by far more important to most estates than the estate tax. Under current law, there is no estate tax in 2010, but all assets with capital gains are taxed at 15 percent above a $1.3 million exemption when sold by heirs.

For example, if you inherit 400 acres of top Iowa farmland worth $7,000 per acre, that’s an estate valued at $2.8 million. Under previous law, you would owe no estate tax and you received a full exemption for capital gains. That’s 400 acres tax free. Now, if you inherit 400 acres this year with a basis of $1.3 million, you would owe capital gains tax on the difference. That’s $1.5 million times 15 percent which means you owe $225,000 in capital gains tax liability. That will be a real shock to a lot of heirs.

The estate tax expired so Republicans can do their happy dance, but the result is that a whole lot more people are going to owe the Federal government a whole lot more money. They aren’t going to permanently eliminate the estate tax and why should they? The claim that the estate tax is having to pay on income twice is patently false.

Under last year’s tax law such a gain was exempt from tax. What a deal! Fabulously generous! There was a full exemption on capital gains and you could have up to $3.5 million in similar gains with no tax obligation.

It’s a wonderful country that allows its citizens to accumulate such wealth tax free. I believe at one time Democrats offered a $5 million individual exemption at a 35 percent estate tax rate and Republicans turned it down because of ideology. What ideology is that?

One where you benefit from the growth, opportunity and success of the country you live in but don’t owe the country anything in return? In my opinion, that’s a twisted, selfish, greedy ideology.

My father passed away last year. His primary asset was 160 acres of farmland. The gain in value over basis was near $4000 per acre well under exemptions. It is estate tax and capital gains tax free. God Bless America!

One could argue, “Well, you already paid property taxes on the land.” That’s true, but I sent my kids to schools and I use the roads and something has got to pay for that. The contention that these kinds of gains have already been taxed is a falsehood.

This is the second time this farm has been inherited and there has never been estate tax or capital gains owed on any of the appreciation in the value.

Only people with capital to make investments will ever generate enough wealth above exemptions to be subject to a capital gains or estate tax. Those who save and invest can pass on their gains to the next generation tax free up to $3.5 million or at least they could until this year.

In our case, we can step up that basis on my father’s farm and still not hit that $1.3 million threshold, but unless capital gains are fully exempted again, the next generation may not be so lucky.

Estate tax law would have to be described as an “unresolved” issue. Next year, the rules change again, but 2010 estates will be governed by 2010 rules. The estate tax law turmoil is an example of the failure of Congress to come to terms with reasonable compromise to find solutions to problems.

The scary thing is that a resolution of the estate tax law impasse is easy compared to more complex entitlement and budget issues looming large in front of us. If Congress can’t settle or fix this, then it can’t fix anything.

The failure of the Congress to fix the estate tax laws will soon impact the decisions made as to what to do with assets in estates. Heirs of 2010 estates are unlikely to sell farms until the “basis” issue relative to capital gains tax liability is resolved. Losing the step up basis provision will impact the farmland market more than the estate tax ever would.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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