By Bill Waltz
Many Hoosier businesses will find themselves in a better place following the completion of this year’s session of the Indiana General Assembly.
The Legislature passed Senate Bill 293, which sets in motion the gradual elimination of Indiana’s inheritance tax – a tax that has hampered the succession and continuation of small, family-owned businesses for decades.
The unpopular tax is to be phased out over a nine-year period beginning next year.
In addition to the long-term benefit of eliminating the onerous tax, the legislation also provides meaningful immediate relief via changes that will reduce the impact of the tax simultaneous with it being phased out.
Beginning this year, the legislation raises the exemption threshold for most inheritors from the current $100,000 level to $250,000.
This will save children inheriting the family business as much as $15,000 this year.
And when the phase-out commences next year, inheritors will also see the tax on the balance of the inheritance reduced by 10 percent each year until 2022.
The phase-out is accomplished by a credit against the tax liability that increases in 10 percent increments every year up to 2022, when it becomes a 100 percent credit and the tax is fully repealed.
Let’s examine a how the legislation will operate in a scenario in which a child inherits business assets worth $1.75 million from a parent proprietor who dies next year.
First, the tax would be reduced by $15,000 as a consequence of the raising of the exemption threshold from $100,000 to $250,000 ($15,000 represents the tax on the additional $150,000 exempted under the new law, taxed at the maximum rate of 10 percent applied to all transfers over $1.5 million).
Then, the $1.5 million balance would be reduced by another $15,000 (representing the savings associated with the initial 10 percent increment of the phase out that starts in 2013, or 10 percent of the $150,000 tax due on the remaining $1.5 million inheritance).
If death occurs after 2013, the savings on the $1.5 million amount would increase by another 10 percent/$15,000 for each subsequent year (for example, 20 percent/$30,000 in 2014, 30 percent/$45,000 in 2015 and so on) until 2022 (100 percent/$150,000).
Such savings are significant to those trying to maintain a business during a period that is not only difficult emotionally but often financially too.
I applaud the Indiana General Assembly for taking the step to rid heirs of this burden.
Their action benefits not just those directly affected but the state in general.
No longer will Indiana stand out in a negative way by imposing a “death tax,” a tax on income and assets on which taxes have already been paid, a tax that encourages retirees to flee their Hoosier roots, and a tax that hampers those who are left to carry on the businesses their parents spent years growing.
The benefits of eliminating the inheritance tax will pay off for generations to come.
Bill Waltz is vice president for taxation and public finance at the Indiana Chamber of Commerce.