Earlier this year, President Obama included such an approach in his FY 2010 budget blueprint. Last week, Senate Finance Committee Chairman Max Baucus (D-MT) also adopted that approach in legislation (S. 722) he introduced to make permanent some of the tax cuts enacted by President Bush in 2001.
Without Congressional action this year, the estate tax will be temporarily repealed in 2010 and then will return to its pre-2001 rates ($1 million exemption per individual and a 55 percent tax rate). Proponents have urged lawmakers to adopt this approach rather than pursuing full repeal of the estate tax because most proposals to fully repeal the estate tax have also eliminated “stepped-up” basis. Under such plans, heirs of commercial properties would avoid the estate tax only to find themselves owing substantial capital gains and recapture taxes.
Under both proposals, the estate tax would be set at 2009 levels of a $3.5 million per individual exemption and a 45 percent maximum tax rate.
The bill would also make lower income and capital gains tax rates permanent for individuals making below inflation-indexed $171,500 ($208,850 if married filing jointly), make permanent marriage penalty tax relief, and enact permanent changes to the Alternative Minimum Tax (AMT). Notably absent from the bill are proposals to prevent increases in income, capital gains and dividend taxes for those taxpayers making above inflation-indexed $171,500 (or $208,850 if married filing jointly).