CBO Estate and Gift Tax Info You (and D.C. Insiders) Should Know

The Estate Tax and Federal Revenue

The CBO analysts note that they have trouble projecting how estate and gift tax proposals will affect federal revenue, because of factors such as uncertainty about the degree of estate planning.

“Tax planning can affect the size and composition of an estate’s assets,” the analysts write. “People may have varying ideas about future tax legislation and about how the law will be applied to their estate. Those factors can affect the degree to which they engage in estate tax planning and other behaviors to minimize their tax liability. For example, some people may set up trusts so that their assets can be transferred to a beneficiary without incurring estate and gift taxes while allowing the donor to receive income from those assets. Other people may decide to sell an asset and realize a capital gain if they anticipate that tax rates on capital gains will rise in the future (or, conversely, they may delay realizations if they believe that rates are likely to be lower in the future.”

The analysts add that, because so few large estates file estate tax returns, they are not sure how well they understand the top end of the wealth distribution.

The Estate Tax and Saving

The CBO analysts say that, in theory, a high estate tax could cause people to spend more money while they are alive, to save and spend less, and to leave less money to heirs.

“Overall, however, the empirical evidence on the effect of the estate tax on savings is inconclusive,” the analysts write.

One reason is that some taxpayers may save and invest more, to offset the effects of the estate tax on the size of the bequests they leave to heirs, the analysts write.

The Estate Valuation Section

The administration of President Joe Biden has proposed trying to increase federal estate tax revenue by include the value of asset appreciation in the size of an estate.

The CBO analysts have included a discussion of how inherited assets are valued for capital gains taxes in the new guide.

“If accrued capital gains were taxed at death, then estates might need to liquidate assets to pay the tax liability due,” the analysts write.

One administrative wrinkle would involve helping taxpayers who were not sure how to calculate the level of capital gains on the assets in an estate.

“Policymakers would need to consider what basis to use to value a decedent’s assets if the original basis could not be determined,” the analysts write.

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