Obama mulls estate tax choice

WASHINGTON Fri Sep 10, 2010 4:33pm EDT

WASHINGTON (Reuters) - Wealthy individuals who benefit from the federal estate tax law, which lapsed this year, may be able to reap a capital gains advantages retroactively, an Obama administration official said on Friday.

The estate tax lapsed for 2010 after lawmakers last year failed to reach a deal to extend it during a squabble over rates.

With its expiration, some taxpayers lost capital gains benefits, which had allowed them to estimate property at current valuations. Now these individuals must value estates on an historical basis -- and pay capital gains on the difference when they sell.

Several billionaires have died this year, escaping the estate tax, including former New York Yankees owner George Steinbrenner. The capital gains benefits apply to those with much smaller estates, of $1.3 million and below.

"If you have an estate that is below that amount you're sort of stuck now," said U.S. Treasury Assistant Secretary for Tax Michael Mundaca, in an interview with C-SPAN Newsmakers. "The problem is for a lot of people not having the estate tax in place is going to be a burden."

Giving taxpayers a choice of whether to apply the tax to 2010 transactions is an option being considered and discussed with lawmakers, Mundaca said.

"That is one of the options that is on the table," Mundaca said.

The U.S. House of Representatives, largely led by Democrats, last year had passed an extension of the 2009 rates, but Senators clashed over the level of the tax.

The Obama administration backs the House of Representatives policy, which taxed estates at 45 percent above an exemption of $3.5 million for individuals and above $7 million for couples.

Without action, under current law the tax will rise to 55 percent, with an exemption level of $1 million, in 2011.

Republicans, who'd prefer no estate tax, would be loathe to let the rate rise and the exemption limit drop, so they are motivated to make a deal with Democrats to extend it.

(Reporting by Kim Dixon; editing by Andre Grenon)

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