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House Nears Vote on Halving Estate Tax Exemption in 2022

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What You Need to Know

  • The provision is now part of H.R. 5376, which could come to the House floor this week.
  • A temporary doubling of the estate tax exemption is currently set to expire in 2026.
  • Heirs paid $9.4 billion in estate taxes in 2016, according to the Joint Committee on Taxation.

The House of Representatives is getting closer to voting on a huge package of budget legislation that could lead to many federal benefits program and tax changes — including a 50% cut in the “basic exclusion amount” that determines which estates pay the federal estate tax.

House leaders have posted a collection of eight big PDF files related to the budget reconciliation process, with the bill number H.R. 5376, on their list of “Bills to Be Considered on the House Floor” this week.

The House has described H.R. 5376 as an item that “may be considered pursuant to a rule.”

The House Rules Committee sets the rules for House floor debate. At press time, the committee had not yet scheduled a meeting for H.R. 5376.

The Estate Tax Provision

The current version of H.R. 5376 is based on a package approved on Saturday by the House Budget Committee, which, in return, was based on a package approved by the House Ways and Means Committee earlier this month.

In H.R. 5376, the estate tax provision in the version of the package now heading toward the House floor is in Section 138207, which is on page 265 of the eighth PDF file posted on the House “to be considered this week” site.

The Tax Cuts and Jobs Act of 2017 includes a “unified credit” tax provision that temporarily set the “basic exclusion amount,” or the amount exempt from estate taxes when a wealthy individual dies, at $10 million. Inflation indexing has increased the actual basic exclusion amount to $11.7 million for 2021, according to a congressional summary of the provision, which starts on page 287 of the third PDF file posted on the site.

Under current law, the unadjusted basic exclusion amount is on track to snap back to $5 million after Dec. 31, 2025.

The Section 138207 tax provision, which is just eight lines long, would replace the current unified credit section given in Section 2010(c)(3) of the Internal Revenue Code with a new section stating, “The amendment made by this section shall apply to estates of decedents dying and gifts made after December 31, 2021.”

The tax rate for affected wealth transfers would be 40%, according to the provision summary.

The effect of the change would be to reduce the basic exclusion amount for estate tax purposes to $6.02 million for 2022.

The provision would also affect the taxation of gifts.

The Potential Impact

In a report the congressional Joint Committee on Taxation prepared in May, committee analysts showed, based on Internal Revenue Service data, that the United States received 7,871 returns for 2016 for estates with a gross value ranging from $5 million to $10 million, and 4,393 returns for estates with more than $10 million in value.

The people who died and had large estates left $25 billion to the surviving spouse and about $12 billion to charity.

The heirs receiving taxable estates paid $9.4 billion in estate taxes.

About 2.8 million people die in the United States every year. In 2016, 12,264 of the people who died, or about 4.4 of every 1,000, left an estate with a gross value over $5 million.

Those figures suggest that lowering the basic exclusion to $6 million could increase the number of estates subject to estate taxes by about 8,000.

But another provision in H.R. 5376, given in Section 138208, which is on page 266 of the eighth PDF, could reduce the impact of the basic exclusion decrease, by increasing the limitation on the estate tax valuation reduction for real estate used in farming or other trades or businesses to $11.7 million, from $750,000.

An increase in the number of people who have to consider the possibility of owing estate taxes could complicate estate planning for those people.

The increase could create opportunities for lawyers, accounts and financial professionals who work with wealthy families to develop plans for managing estate tax obligations and insurance arrangements or other arrangements for paying the taxes.

The Budget Reconciliation Process

Under normal Senate rules, supporters of legislation need 60 votes to get the legislation to the Senate floor for a vote.

The budget reconciliation process gives legislation supporters a way to call for a Senate vote on a measure even if supporters have rounded up just 51 votes.

Democrats now hold 50 of the 100 seats in the Senate. Vice President Kamala Harris can cast a vote to break ties.

The House will have to work with the Senate to try to come up with a budget reconciliation package that both chambers can pass. Democratic congressional leaders have been working to reconcile the views of Senate Democrats who want to see major expansion of U.S. social welfare programs, such as the additional of dental, vision and hearing benefits to basic Medicare, and Senate Democrats who are concerned about the cost of the proposals.

It’s uncertain what, if any, budget reconciliation will pass, what any package that passes might look like, and how the provisions in any package that becomes law would be implemented.

The U.S. Capitol (Photo: Diego M. Radzinschi/ALM)