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Friday, December 18, 2009

Estate Taxes and Natural Experiments

As the NYT reports this morning, the controversial estate tax is going to enjoy a one year repeal before it arises again in 2011. Empiricists: now's your chance to start looking at the tax effects on death. As the Congressman says, "If you are at the checkout counter, you might want to expedite things."

Posted by Dan Markel on December 18, 2009 at 11:16 AM in Tax | Permalink

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Except for most Americans, the tax calculus is likely the reverse of what your post suggests.

IRC 1014(f) says that heirs do not get stepped-up basis in inherited property after December 31, 2009. As a result, many (if not most) heirs will end up paying more taxes under the no estate tax regime than under the existing estate tax, assuming they will try to sell at least some of the inherited property.

Still, it would make for an interesting empirical study: do heirs who wouldn't pay estate tax but will get hit by income tax on the difference between carryover basis and sale price expedite the matters. Obviously, if people are not aware of the basis problem ...

Posted by: Urska | Dec 18, 2009 1:20:11 PM

Joel Slemrod has already written a similar paper: “Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity,” (with Wojciech Kopczuk), Review of Economics and Statistics, May 2003, 85(2), pp. 256-265. The paper looked at U.S. tax returns around times of changes in the estate tax. They found some elasticity in time of death depending on the tax effect of dying, but couldn't rule out that people were just lying about the death date. If you have access to JSTOR, the paper is available here.

Posted by: Sarah Lawsky | Dec 18, 2009 2:01:39 PM

I thought date of death values in 2010 for purposes of basis would continue with an asset cap similar to 2009's $3.5 million. Is this not so?

One of the problems with carryover basis is that the IRS may not have records readily available in reviewing income tax returns to challenge a taxpayer's statement of basis in reporting gains on sale or exchange other than to require the taxpayer to document reported basis. This could be an administrative nightmare.

Posted by: Shag from Brookline | Dec 19, 2009 9:26:46 AM

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