I think this bears further explanaton. Mr Bigbux buys stock for $100K. At the time of his death they are worth $2.4 million. The capital gain on that investment is never taxed and the “basis” of the stock is set to $2.4 million. If the person who inherited the stock sold it immediately, there would be no tax on it.
On the other hand, had Mr Bigbux sold the stock a week before his death he would have paid capital gains taxes.
So in the end, the rules of the big, bad “Death Tax” (cue music) often means less taxes are paid.
In case anyone is curious as to why I opened this thread.
I watched 7 pounds the other night, in the film Will Smith adopts the guise of an IRS inspector and tells one woman that she owes the gummint something in the region of $50,000 :eek:
This aroused my curiosity as I couldn’t see any working class pleb owing anything near this in the UK
It easily could have been. If the IRS took a close look at your return one year, and found some major discrepancies, they’d certainly look at previous year’s returns too. According to the IRS (warning pdf), the statute of limitations is 3,6, or infinite years depending on whether you made a small mistake, a big mistake, or committed fraud. So if you’ve been cheating for years, and had the bad luck to be pulled out of the pile for a thorough investigation one year, it’s quite likely all your cheating will be discovered.
The business that I work for has to pay tax on its income. From what they have left, they give some money to me. When I get it, I have to pay tax on it.
To me, this sounds quite the same as estate tax.
My father paid tax on his income. From what he has left, his estate left some to me. When I get it, I have to pay tax on it.
It could easily have been a period of more than one year.
I haven’t seen the movie - But not filing your taxes and owning a small business - $50k may be a reasonable amount to owe if your small business is successful. Particularly if you didn’t incorporate it in a way to limit tax exposure (the big business in the U.S. is not really in tax preparation - although our tax laws seem confusing, MOST people have very simple tax returns. The big business is in tax planning - for instance, trying to form a business in a fashion that will create the least tax exposure. Or structuring your estate to create the least tax exposure. The silly thing about the ‘death tax’ logic is that it has never been difficult with a little tax planning for most people to make it a non-issue - and anyone with the sort of money that is going to get hit can afford a good estate attorney or CPA who specializes in tax planning.)
It’s an effort to prevent wealth from concentrating into a few hands (each generation increases the families wealth instead of having to build their own). The risks of inherited wealth can be seen in many south american countries where a small number of families control the vast majority of wealth and property.
Because we are supposedly a society where one’s place is based on merit, not inheritance. In an ideal meritocracy, the estate tax would leave only enough to cover debts and burial expenses, assuming the deceased didn’t have any dependents, but that would probably be too much for most people to swallow.
Thus, you have the estate tax, where you get to leave your kids/wife/mistress/dog/stylist up to $3.5 million tax-free, and the remainder is taxed at 45%.
ETA: zwede explained it well. I mean, really, screw the Vanderbilts.
The other thing at work is that someone needs to pay the bills the Federal Government runs up on their credit card. We try for “fair” tax policy - and a lot of people believe it is more fair to tax one person who is getting $5 million dollars because they happen to have been born with a silver spoon in their mouth than to increase taxes on a bunch of people busting their butts to make $30k as carpet installers.
I think you have shot yourself in the foot here. The business that you work for does not pay you from taxed income (unless you are paid through dividends). The business deducts your pay from their revenue, along with their other expenses. They then pay tax on the resulting profit.
Here’s a scenario. She’s a small business owner. She has one employee, who makes a measly $20,000 per year. The business owner has a net profit of $50,000. So we’re talking lower middle class.
Payroll tax is 15.3% of $20,000 per year, plus federal withholding. Let’s call that $4,000 over a year. Add 25% for failure to file, 10% for failure to make deposits, 6% for failure to pay and 6% in additional interest: $1,880 additional. Now we’re up to $5,880. (I’m assuming no punitive penalties, which could be 100% of the tax).
She also owes $434 in federal unemployment (failure to pay state UI means she defaultsto a higher rate). Add in all of the above penalties except the deposit requirement: $595 total.
Now we come to her personal tax side. $50,000 in net income is subect to self-employment tax, which is about 15% (it’s 15.3% of 92.35% of income). $7,500 there, roughly. We’ll assume some deductions and such for taxable income of $40,000. That’s another $5,600 in tax, for $13,100 total. I’ll ignore an underwithholding of tax penalty, which is probably only $200 or so more. Add the same sets of penalties and you add another $4,847. That’s $17,947 on the personal side.
So here’s a “working class pleb” who now owes $24,422 or nearly half of her net income for the year in back taxes, penalties and interest. If she did that two years in a row, she’d be up to $50,000. If she had higher income, more employees, etc. that would make it easy to get to that level in just one year.
Good idea, I should have thought not everyone would know what “unrealized capital gains” were. Most assets in the hands of multi-millionaires are capital assets, of course. Capital assets that have never had any capital gains or income taxes paid on them.
Well, he really wasn’t an IRS agent, and it was a movie. My Bro, a IRS Agent for 20 years,said that amount of deficiency in a case like that would be nearly impossible, unless she hadn’t filed at all, and there were Payroll taxes. More likely is $5000. On preview, more or less what dracoi sez.