Getting Nipped In The Ass, GOP Style

So repealing the estate tax is gonna save heirs money? Maybe. Maybe not. AP (04.13.05), via San Francisco Chronicle, via CJRDaily:

"A study by a senior aide to Democrats on the House Ways and Means Committee concluded that there would be more losers than winners if the estate tax is repealed. If the estate tax were repealed in 2009, the study estimated more than 71,000 estates could face new capital gains taxes. Under the estate tax laws scheduled to be in place that year, about 15,000 would owe estate tax." GOP's Estate Tax Push May Work in Senate

What the hell? How can that be? Well, aren't you glad you asked. It's this thing that happens to the basis of assets upon death. Under current law, stuff gets what's known as a "stepped-up" basis. Let's say granny buys stock for $1.00. That's her basis for purposes of computing gain. Let's say the stock's value goes up to $5.00, and granny sells. Sale price - basis = gain, or $5 - $1 = $4.. Granny's gain is $4.00, and that is income and that is subject to income tax. Now let's say granny tips before she sells, and leaves the stock to me. My basis magically becomes $5.00, as in the basis is "stepped-up" from $1.00 to $5.00 upon granny's death. If I turn around and sell it for $5.00, There's no gain, therefore no income tax. I just get the $5.00. What the hell? What happens to the gain? It disappears, as in it escapes taxation. Does granny's estate get taxed? Maybe. Depends on how much it's worth. Fast forward to 2010. Let's assume the basis of granny's stock is $1 million, that she dies in 2010, that the stock is worth $3.5 million when she dies, and that I'm the sole heir. No step-up in basis, so my gain is $3.5 million - $1 million = $2.5 million. Yeouch!! But I get a one-shot gain exclusion of $1.3 million. Still, my net gain is $1.2 million, and that makes for some income tax. But wait!! There was no estate tax, so I saved there, right? Maybe. Maybe not. Under current law, in 2009 the "Applicable Exclusion Amount" for an estate is $3.5 million, meaning if the estate was worth that or less, there's no estate tax. I get the stock with a stepped-up basis, and could turn around and sell it without realizing any gain. No estate tax; no income tax. Sweet!! But wait: granny dies in 2010, not 2009. No estate tax under the new law, but I get stuck with $1.2 million of gain. And the income tax that goes with it. No estate tax, but lots of income tax. Therein I yam nipped in the ass under the new law. So here I am in 2010, down in Aruba, bitching about how I got about $3.2 million (let's assume a 15% rate on long-term capital gain for the feds, and a 7% rate for the State) instead of $3.5 million. Altogether now: wah, wah, wah!! Still, $300,000 is serious dough.