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Early in the Bush Administration, Congress decided to phase out the estate tax–the so called “death tax.” The tax is paid upon the receipt of an inheritance. But, apparently to confuse everyone, Congress decided to only phase it out for a year. Next year, the tax returns full force, back to the levels it was in the ’90s.

Just because someone dies this year, it doesn’t mean you’ll pay no tax. In fact, many who are not terribly wealthy will pay more taxes on the money they earned without the estate tax. Previously, there was no tax on an estate worth less that $3.5 million (double that for a couple). Now, without the estate tax, heirs will pay tax not on the estate but on the capital gains. So, if a stock was bought for $1 30 years ago and is now worth $1,000, an heir will pay tax on the gains of $999. The Wall Street Journal explains how this affects those with a modest estate more than the wealthy:

Consider how differently this year’s and last year’s regimes treat the same asset held by two fictional widows: Ms. Bentley has total assets of $20 million, while Ms. Subaru’s total is $2 million. Each owns a $110,000 block of the same stock bought for $10,000 years ago. This simplified example uses a block of stock, but its logic applies to all appreciated assets, including houses and land.

Under current law Ms. Bentley and her heirs prosper. If she dies this year and the stock is sold, her heirs will owe only a $15,000 capital-gains tax, whereas last year the same move would have incurred nearly $50,000 in estate tax. By contrast, Ms. Subaru’s heirs would have owed nothing last year because the estate was below the $3.5 million exemption. This year they would owe the same $15,000 capital-gains tax Ms. Bentley’s heirs do.

If you have reason to expect to pay this “non-estate” tax this year, the accounting can get tricky, and it may be helpful to consult a professional.

But otherwise don’t worry, surely Congress will fix it!

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