Independent Sector Fact Sheet on the Esate Tax

What is the Status of Legislation in the 109th Congress?

House

• On April 13, 2005 the House of Representatives passed a bill (HR 8) to permanently repeal the estate tax by a vote of 272 to 162.
• During consideration of the bill, the House rejected a compromise offered by Rep. Earl Pomeroy (D-ND) by a vote of 194 to 238. The Pomeroy substitute would have increased estate tax exemption levels immediately to $3 million ($6 million for couples), and again to $3.5 million ($7 million for couples) after 2009.
• In the 108th Congress the House passed a permanent repeal of the estate tax (H.R. 8) by a vote of 264-163.
  

Senate

• Senator Jon Kyl (R-AZ) introduced a bill in the Senate (S 420) to permanently repeal the estate tax. Co-sponsors include 10 Republican Senators and one Democrat, Senator Bill Nelson (D-FL).
• Republican and Democratic leaders are currently working to craft a compromise.
• Although a similar bill was introduced in the 108th Congress, the Senate did not vote on the measure before adjourning in December 2004.

What is the Relationship Between Estate Taxes and Charitable Gifts?

• The estate tax includes an unlimited deduction for charitable giving, providing a valuable incentive to donate a portion of the estate to a charity or philanthropic fund. Although Americans have always supported a strong and independent charitable sector and give primarily out of a sense of altruism and compassion, policy makers have long recognized the vital role tax incentives play in encouraging Americans, particularly wealthy taxpayers, to increase their charitable giving.
  
  
• A July 2004 report by the Congressional Budget Office¹ (PDF) (CBO) found that the estate tax not only provided an incentive for charitable giving at death (bequests), but also plays an important role in the philanthropic decisions people make throughout their lives.
  
  
• The CBO report looked at the tax year 2000 in which one-sixth of estate tax returns filed showed a charitable bequest. These bequests totaled $16 billion. The report concluded that if the estate exemption level had been $2 million or $3.5 million in that year, bequests would have declined by 8 to 15 percent. Had there been no estate tax in 2000, charitable bequests would have declined by 16 to 28 percent.
  
  
• Bequests represent more than 25% of the total lifetime charitable giving of very wealthy individuals. The Internal Revenue Service (IRS) reports an 18.2% decline in charitable bequests from 2002 to 2003. Total bequests in 2002 were $17.83 billion and in 2003 they were $14.6 billion.
  
  
• A Brookings Institution report ² from June 2003 stated that “…estate tax repeal would reduce charitable bequests by between 22 and 37 percent, or between $3.6 billion and $6 billion per year.” The report also found that “…repeal would reduce giving during life by a similar magnitude in dollar terms.” This means that an annual total of $7.2 billion to $12 billion could be lost to charitable institutions. This is equivalent to the total amount of grants currently made by the largest 110 foundations in the United States.

Where Do Bequests Go?

• Many bequests go to religious organizations. According to Giving USA Surveys, all large religious organizations, more than half (56%) of medium-sized religious organizations and nearly a quarter (24%) of small religious organizations received bequests in 2001.
  
  
• Educational institutions, hospitals, social service organizations, humanitarian assistance organizations, arts institutions, and every other segment of the charitable sector benefits from charitable bequests and/or grants from foundations or philanthropic funds established by bequests.
  
  
• Over half of all money given through bequests goes to foundations, either to create or substantially increase the assets of these institutions. This type of bequest usually reflects the decedent’s intention to provide long-term support to nonprofits through annual grants.³

Who Pays Estate Taxes?

• In 2002 the amount of wealth subject to the estate tax rose to $1 million for an individual ($2 million for a couple), up from $650,000 in 2001. The amount of wealth subject to the tax rose to $1.5 million for an individual in 2004 ($3 million for a couple) and is scheduled to go to $2 million for an individual in 2006 ($4 million for a couple). By 2009 only estates with wealth in excess of $3.5 million for an individual ($7 million for a couple) will be subject to the estate tax. The top estate tax rate will be 45 percent in 2009, down from 55 percent in 2001.
  
  
  
• The vast majority of Americans are not subject to estate taxes at death. As the asset amount exempt from the estate tax rises, the number of estates subject to the tax declines. Today the tax applies to only 2 percent of estates. By 2009, it is estimated that less than ½ of one percent (0.005) of Americans will be subject to the estate tax. Under current law, the tax will be eliminated altogether in 2010, but will be reinstated at 2001 levels in 2011 unless Congress passes new legislation.
  
  
  

1 The Estate Tax and Charitable Giving (PDF), Robert McClelland and Pamela Greene, Congressional Budget Office, July 2004.
2 Effects of Estate Tax Reform on Charitable Giving, Jon M. Bakija and William G. Gale, Brookings Institution, June 2003.
3 The Adverse Impact Estate Tax Repeal Has on Nonprofits (PDF), a fact sheet prepared by Americans for a Fair Estate Tax.

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IS Letter to the House on estate tax

Last updated: April 14, 2005