I see.
So that's where the "taxing the same dollars" thing comes from.
So why aren't the heirs taxed on what is clearly "income"?
Originally inheritances were taxed as income, because they fit the definition of 'income' in the Code and per various definitions used by the courts.
That changed with the estate tax, which is an alternative to the income tax on inheritances and gifts. Now instead of taxing the transfer as income to the beneficiary, it's taxed at the estate level. Having the ESTATE pay the tax is just an administrative decision. The alternative is having perhaps dozens of heirs, all required to report inheritances on separate returns, then trying to collect from each of them, at perhaps varying rates. And let's say you inherit a gun, or a farm, or a house, or mama's diamond ring. You have no cash to pay the tax, but would owe it upon receipt. Essentially the executor is tasked with deciding which assets to sell, if necessary, to fund the tax, and it makes things easier for the heirs who are relieved of this burden. It also greatly simplifies administration by the feds and the states. So it's easier, more efficient, for everyone to have the estate file a single return and pay the tax for all heirs.
Is it just so inheritance taxes can be called "unfair"?!
Yes, that's part of the talking point, but the "unfair" part is complete BS IMO. Bottom line is for everyone today whose family is worth less than about $15 million, the estate tax is a HUGE tax loophole, a tax benefit. The first roughly $11 million is tax free (5.5m for dad, 5.5m for mom). Basic planning gets the number to $15 million or more estate tax free or nearly so. So the estates worth less than (let's say) $15 million pay NO estate tax and NO income tax on the transfers.
But it gets better. For the 99.?% of families who owe no estate tax, they also get a step up in basis, so any untaxed gain in an asset at daddy's death goes POOF! Let's say dad bought a farm in 1947 after WWII for $3,000, and it's now in a metro area worth $8 million. If daddy sold the farm while alive, he'd owe tax on $7,997,000 in gain. If daddy can hang onto the farm until death, the heir get the farm, write the value up to $8 million, and can sell it the day after the estate closes and pay $0.00 in income tax.
Bill Gates is another example. He's worth $billions, most of it Microsoft stock, in which his basis is roughly $0. Any stock he sells while alive is taxed as income for the full selling price. If he liquidated his position in MSFT he'd owe $billions in tax on the gains. Under the estate tax rules, his heir inherit at the value of the stock on the day he died, and if they sell they'll owe $0 in income tax. Of course under current rules, his ESTATE would owe quite a bit on the MSFT stock, but the GOP wants to repeal the estate tax AND keep the step up in basis rules. So the estate would owe no estate tax and heirs would owe no income tax on the billions in gains in Gate's estate that has in fact NEVER BEEN TAXED (the value of is MSFT stock on the day he died).
Here's the bottom line - the estate tax is a huge tax BENEFIT for at least 99.5% of the country. There is nothing unfair about it for the VAST majority. The only whiners are the plutocrats and their servants in the legislatures.
