Lawmakers in the House Small Business Subcommittee on Economic Growth, Tax and Access held a hearing last week on the impact of the federal estate tax and the changes set to take effect at the start of next year.
Current federal tax law
exempts estates under $5 million, while those with assets above that threshold are taxed up to 35 percent. However, unless Congress acts before the end of this calendar year, that tax-free level will drop to $1 million with the top tax rate jumping to 55 percent. An additional surtax of 5 percent will also be assessed on very large estates.
Some small business owners testifying at the hearing said that their companies may be adversely affected by the lower exemption. Karen Madonia, chief financial officer of an Illinois air conditioning and refrigeration company, said her business needs to have a valuable inventory, even if its liquid assets are less extensive.
“In most cases, we’re not talking about passing on bank accounts with multimillion-dollar balances. We’re talking about businesses where most of the net worth is tied up in inventory, accounts receivable, equipment and real estate,” she said.
Estimates from the Tax Policy Center show that the $1 million exemption would result in approximately 53,000 estates being subject to federal taxes, compared to less than 4,000 this year.
Others testifying at the hearing added that while the estate tax itself represents a fiscal burden on some companies, repeated changes to the regulations have exacerbated the issue. Data from the American Bar Association shows that the exemption level has changed five times since 2001.
The estate tax is one of many tax and budget issues which have been highlighted as the “fiscal cliff” by Federal Reserve Chair Ben Bernanke. Roughly $7 trillion in tax increases and spending cuts will start on January 1 without further action.