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Old 02-22-2011, 10:43 AM   #121
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The worst are estates with large 401k/IRA balances in which estate tax is due with no other assets available to pay tax.

In that case the heirs must liquidate the qualified assets which then triggers income taxes. They could pay 35% Federal income taxes and then have to pay the estate taxes with whats left over. Note that estate taxes are due on the gross estate, not what's left over after income taxes. The net total Federal tax rate would then be well over 70%.

And then there is whatever your state wants in income and estate taxes. That could easily take another 20% of the gross leaving the heirs with maybe 10% of the total.

The net tax rate in this case is just short of confiscation.
I agree that the net tax rate is high but you are talking about two separate taxing events which happen to occur at the same time. You have the deferment of taxes on the 401(k) or IRA which was a choice by the account's owner (decendent) to not pay income taxes when the income used to fund those accounts was generated. Then, the estate tax occurred because there was a transfer of money from the decedent to another party.

While the decedent could not control dying, he and his heirs could have made different financial planning choices to spare his heirs more of the tax bite. He could have converted to a Roth IRA and paid the income taxes himself. He could have set up a Stretch IRA to stretch out the tax bite among his beneficiary(ies).
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Old 02-22-2011, 10:58 AM   #122
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The worst are estates with large 401k/IRA balances in which estate tax is due with no other assets available to pay tax.

In that case the heirs must liquidate the qualified assets which then triggers income taxes. They could pay 35% Federal income taxes and then have to pay the estate taxes with whats left over. Note that estate taxes are due on the gross estate, not what's left over after income taxes. The net total Federal tax rate would then be well over 70%.

And then there is whatever your state wants in income and estate taxes. That could easily take another 20% of the gross leaving the heirs with maybe 10% of the total.

The net tax rate in this case is just short of confiscation.
Agree...100%. On the surface it may seem like a good problem to have..but there are pitfalls. You have mentioned a big one! Here is another. The family home. It's value at Date of Death was....let's say $400,000. That value was placed on the estate tax filing. That value helped escalate the overall value of the gross estate ..and some portion of the federal estate taxes owed was due to this value. Now consider that home is worth half of that. Heirs will never get the $400,000 but they paid the tax as if they would. There is something called "Income in Respect of a Decedent" that can come into play here..but we haven't gotten that far - house hasn't sold...

All in all how one is affected depends solely on what laws are in effect at that time. One family could have been wiped out 10 years ago....while another family today is made whole. Seems there should be some retroactive give back to the family that was wiped out. This would be the moral and ethical thing to do in my opinion. (we would not be one of those receiving any of these so called give backs- we ended up just fine ..meaning....my eye is towards those that were wiped out)
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Old 02-22-2011, 11:06 AM   #123
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He could have set up a Stretch IRA to stretch out the tax bite among his beneficiary(ies).
A stretch IRA wouldn't work. remember that they have to liquidate the assets to pay the estate tax which is due.
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Old 02-22-2011, 11:17 AM   #124
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I agree that the net tax rate is high but you are talking about two separate taxing events which happen to occur at the same time. You have the deferment of taxes on the 401(k) or IRA which was a choice by the account's owner (decendent) to not pay income taxes when the income used to fund those accounts was generated. Then, the estate tax occurred because there was a transfer of money from the decedent to another party.

While the decedent could not control dying, he and his heirs could have made different financial planning choices to spare his heirs more of the tax bite. He could have converted to a Roth IRA and paid the income taxes himself. He could have set up a Stretch IRA to stretch out the tax bite among his beneficiary(ies).
Scrabblers...the heirs in a lot of cases have no control over what their parents did or are doing. The elderly also have a hard time keeping up with the changes much less understanding some of the basics. My father ..never grasped that the value of my mothers marital trust would be includable in his gross estate....which triggered the estate tax. From his own planning...he planned well except for this tiny little detail (big). Yes it was explained to him many times. All of which begs a point....some of the final estate taxation planning and consequences comes at a time in life when many are incapcitated, perhaps not in control but haven't given up control....and is nothing more than taking advantage of the old and dying.
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Old 02-22-2011, 11:28 AM   #125
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OK, then it's a slipperly slope. If you accept that taxing estates is morally justifiable, then why the $5 million exemption? Why are dead middle-class people exempt, but dead rich people are gouged?

If it's a moral tax, then why isn't it applied evenly?

Because it's not actually about fairness - it's clearly actually about envy. It drives us nuts to think about Paris Hilton being set for life just because she came from the right uterus. So we make up all these rationalizations for taking her dad's money. But of course, our own parents aren't rich. So let's set the bar at, let's say "rich," as yet another tool to drag down successful people and redistribute their wealth to the lazy, less-successful proletariat.

I think we have one of the problems identified here...

What does morals have to do with taxes An estate tax is just as morally justified as income tax, property tax, sales tax, excise tax etc. etc. etc.

Your example is flawed... Paris Hilton would be rich even with the current estate tax... just not as rich... and I could care less about her being lucky...
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Old 02-22-2011, 11:35 AM   #126
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This is where I agree. From personal experience I can tell you we have invested back into our company many times over what our company is actually worth. That investment comes in many forms...capital investment, employee benefits, addition of new employees...etc. Let's say for example a company was started with $20,000 and today it is worth 5 million. Let's also say that over the last 10 years the company invested 5 million back into the business....I don't believe there should be cap gains either. So I think we agree here. Nor do I think it should be taxed or a tax factor with the estate tax...but it is. There is no way to get a credit against basis for this "reinvestment".
The problem many small business owners face is personal liquidity particularly if it is an S Corp. Many take out life insurance or "save their you know whats off"....specifically to protect their heirs against escalation of the value of the stock in their estates. Otherwise....their heirs inherit the problem of paying the tax bill with potentially no money to do so.

I do not know many successful small businesses who do not reinvest back into their company.
Now...I would also agree that if someone started a small business for $20,000, never put a dime back in and in 30 years the business is worth 5 million...there should be some sort of cap gain....but it is more than likely if the small business was run this way...it would have gone bankrupt in the first 3 years.
I am just doing this for discussion purposes... not to try and rile you up...


But, if you reinvest money back into the business.... either your basis has gone up and the cap gain would not be as much... OR, the money reinvested has not been taxed... so the first is investing money that has been taxed before putting it back in the business and your basis is higher, the second is with untaxed money and your cap gain would be higher...

The problem is the estate tax treats both the same... and taxes both the same...
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Old 02-22-2011, 11:37 AM   #127
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The worst are estates with large 401k/IRA balances in which estate tax is due with no other assets available to pay tax.

In that case the heirs must liquidate the qualified assets which then triggers income taxes. They could pay 35% Federal income taxes and then have to pay the estate taxes with whats left over. Note that estate taxes are due on the gross estate, not what's left over after income taxes. The net total Federal tax rate would then be well over 70%.

And then there is whatever your state wants in income and estate taxes. That could easily take another 20% of the gross leaving the heirs with maybe 10% of the total.

The net tax rate in this case is just short of confiscation.

Not sure if it is still available.. but way back when I did taxes... there was a deduction for income in respect of a decedent... since I have not looked it up and this is from over 30 years ago, my memory is a bit fuzzy... but you get to deduct the estate taxes paid on the income that is being taxed... so your tax rate is not as high as you might think....
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Old 02-22-2011, 11:45 AM   #128
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Agree...100%. On the surface it may seem like a good problem to have..but there are pitfalls. You have mentioned a big one! Here is another. The family home. It's value at Date of Death was....let's say $400,000. That value was placed on the estate tax filing. That value helped escalate the overall value of the gross estate ..and some portion of the federal estate taxes owed was due to this value. Now consider that home is worth half of that. Heirs will never get the $400,000 but they paid the tax as if they would. There is something called "Income in Respect of a Decedent" that can come into play here..but we haven't gotten that far - house hasn't sold...

All in all how one is affected depends solely on what laws are in effect at that time. One family could have been wiped out 10 years ago....while another family today is made whole. Seems there should be some retroactive give back to the family that was wiped out. This would be the moral and ethical thing to do in my opinion. (we would not be one of those receiving any of these so called give backs- we ended up just fine ..meaning....my eye is towards those that were wiped out)

Wow... someone else beat me to the IRD... but I will not change my prior post...

You example of a home is not valid in that if the person bought the home for $400K and it is now worth $200K... he will not have gotten his money out of the house.... the outcome is still bad in that there was a $200K loss that can not be deducted... the estate tax did not change this transaction....

Nobody was wiped out.... they might not have gotten the person's whole estate, but they got something they did not have prior to the death of the person... even if it was smaller than the person had...
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Old 02-22-2011, 11:55 AM   #129
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I completely agree with your statement. I think that if a person argues that it is fair to imposes higher rates on those who make greater income because they are more able to pay higher taxes, then their reasoning is better served by taxing wealth because it is a better measure of who can pay.

I absolutely do not think a tax on wealth is fair and I am completely against such a scheme. I just want to point out a flaw in the logic of one argument in favor of higher rates for higher income.
With all due respect, we're not at all in agreement. I do agree with taxing income, in all forms, even progressively as has been the norm. I don't agree AT ALL with taxing wealth as a 'better measure of who can pay.' I think you gave earlier examples of student loans, higher than average number of children as reasons for a high income family would be less able to pay commensurate taxes. Those are personal choices, so I respectfully disagree with your POV. But I may be missing something, your two paragraphs don't seem consistent, but it's probably my read...
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Old 02-22-2011, 12:12 PM   #130
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Scrabblers...the heirs in a lot of cases have no control over what their parents did or are doing. The elderly also have a hard time keeping up with the changes much less understanding some of the basics. My father ..never grasped that the value of my mothers marital trust would be includable in his gross estate....which triggered the estate tax. From his own planning...he planned well except for this tiny little detail (big). Yes it was explained to him many times. All of which begs a point....some of the final estate taxation planning and consequences comes at a time in life when many are incapcitated, perhaps not in control but haven't given up control....and is nothing more than taking advantage of the old and dying.
But my point remains - don't blame the tax code for 2 separate, taxable events caused by someone's death.
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Old 02-22-2011, 12:22 PM   #131
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A stretch IRA wouldn't work. remember that they have to liquidate the assets to pay the estate tax which is due.
A stretch IRA would preserve what isn't needed to pay the estate tax. So it would partly work.
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Old 02-22-2011, 12:27 PM   #132
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With all due respect, we're not at all in agreement. I do agree with taxing income, in all forms, even progressively as has been the norm. I don't agree AT ALL with taxing wealth as a 'better measure of who can pay.' I think you gave earlier examples of student loans, higher than average number of children as reasons for a high income family would be less able to pay commensurate taxes. Those are personal choices, so I respectfully disagree with your POV. But I may be missing something, your two paragraphs don't seem consistent, but it's probably my read...
I only claimed to agree with the one paragraph you wrote and I quoted.

I had no intention of making any claim whatsoever that you agree with me about any of my statements whatsoever.

The first paragraph is a statement about a hypothetical argument with which I don't agree. The second paragraph is my opinion. The two paragraphs are meant to be contradictory. It probably wasn't clear as I don't have as much time as I would like to write responses properly.

Intelligent minds can and often disagree. I just wanted to vent my opinion and never intended to try to convince anyone I'm right. Thanks for indulging.
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Old 02-22-2011, 12:52 PM   #133
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I disagree. It's clear that people need a basic amount of income in order to buy food and shelter, but there's no "basic amount" people deserve/need to inherit tax-free in order to meet those same needs. Income is necessary to meet the basic needs of life, but inheritances are entirely gravy. The only explanation that makes sense to me for the estate tax exemption is envy.
I disagree that the standard deduction is necessarily related to basic food and shelter. It is under $6,000, far below the federal poverty level for one person (~$11,000 outside of Alaska and Hawaii). States surely don't follow the lead, either.

I could see the estate tax exemption as the sum of 70 or 80 years of standard deductions, indexed over time. I don't buy your envy remark but won't stop you from feeling that way.
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Old 02-22-2011, 02:25 PM   #134
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Some interesting discussion on Fair Tax, deductions, etc., but over 300 views and 25 replies into it, I wonder where the 'first we should increase taxes on the rich folks' are? No way they could miss this thread given the title. Unless I missed it, no one (and some have stated it plainly in other recent threads) who agrees with the premise has answered the question posed - except Katsmeow, and I applaud you.
I skipped ahead when I read this, so I don't know if I'm the first.

I think we should increase taxes on the wealthy. The tables you posted were for labor income, not capital income. In 2007, the top 400 reported incomes averaged $345 million and paid 16.6% FIT. They did that because they categorize their incomes as dividends or capital gains instead of wages, and we've got a huge discrepancy in FIT rates based on the source of your income.

Yes, balancing the federal budget will require a lot more than taxing the rich, but 15% vs. 35% doesn't work for me.
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Old 02-22-2011, 02:55 PM   #135
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If we're going to climb out from under the mountain of debt we're in, the gov't is certainly going to have to invent new ways to tax wealth as well as income. I think we all know it's coming and I'm really curious to know what creative mechanism they come up with. Will they shoot me in the knee cap? Kick me in the balls? Hold my hand in a flame? Pull out my finger nails with rusty pliers? You know they're going to do something. But what will it be? Pulling the plow like a Georgia mule for 40 years, leading a responsible, LBYM life and trying to be a good citizen has to be punished in some way!
A kick in the balls sounds about right. It could be the finger nails or the knee cap as you suggest. But anticipating the usual government result my money (literally) is on the kick in the balls option.
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Old 02-22-2011, 03:16 PM   #136
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But my point remains - don't blame the tax code for 2 separate, taxable events caused by someone's death.
I think my point is that it is too complicated...especially for the elderly...and so in my humble opinion I believe I can fault the tax codes as well as the politicians who change the potential outcomes....depending. Is the complication of it NOT part of the motivation for changing it? That is certainly the reason I hear from the politicians and others.
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Old 02-22-2011, 03:19 PM   #137
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Keep in mind now, that the highest brackets only apply to income above the threshold. Don't confuse a marginal tax rate with an average rate. So if you make exactly $250k then you'll pay at the lower bracket. But yes each additional dollar you earn gets taxed at the Bill and Melinda rate.

Yes, you read my post correctly and I think your understanding of marginal and average tax rates is correct.

It really does seem amazing that the current administration wants a working couple, say professionals making a combined $260k to be in the same marginal tax bracket as Bill and Melinda Gates. Unbelievable.
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Old 02-22-2011, 03:23 PM   #138
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It seems that, as I suspected, nobody can offer a rational, moral justification for an estate tax. The best anyone seems to be able to offer is, "they're dead so they won't miss it, and it's not fair that their hiers get to inherit money, because I don't have any rich relatives."

I reiterate that it seems entirely rooted in envy. Every penny in the estate (save funds in tax-shelters like a 401(k)) has already been taxed. It's what's left after a lifetime of taxing and saving. What possible moral justification can be made to tax the whole pile again?
I agree kombat. What a person has built up after decades of work and toil they have been taxed on many times over. So why should it be taxed again...just because that person dies.? That gross estate should be considered net of tax money/assets. When one really thinks about this....there is no justification moral or otherwise....other than the government wants the money.
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Old 02-22-2011, 03:36 PM   #139
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I skipped ahead when I read this, so I don't know if I'm the first.

I think we should increase taxes on the wealthy. The tables you posted were for labor income, not capital income. In 2007, the top 400 reported incomes averaged $345 million and paid 16.6% FIT. They did that because they categorize their incomes as dividends or capital gains instead of wages, and we've got a huge discrepancy in FIT rates based on the source of your income.

Yes, balancing the federal budget will require a lot more than taxing the rich, but 15% vs. 35% doesn't work for me.
Well..I hear you on this but as an aside I think the lower rate on cap gains was initially an incentive for people to invest. If the money isn't invested the government get nothing.(might be where we are heading)

If people are going to be taxed at regular income rates they may not invest to the same extent..or will put most in tax free investments (before they do away with those too!) and the Federal government may actually get less in revenues.

It is certainly more of an incentive for us to keep 85% of investment gains than ....65% or 70% or whatever.
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Old 02-22-2011, 03:48 PM   #140
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I agree kombat. What a person has built up after decades of work and toil they have been taxed on many times over. So why should it be taxed again...just because that person dies.? That gross estate should be considered net of tax money/assets. When one really thinks about this....there is no justification moral or otherwise....other than the government wants the money.

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