How does the estate tax affect you? Likely, it does not affect a majority of us in the last few days of 2010. But it may begin to impact more of us, beginning January 1, 2011, if Congress does not pass the current tax-cut extension package recently negotiated by President Obama and the Republicans.

Writing for the LA Times, Lisa Mascaro and Michael Muskal report that liberal Democrats in the House of Representatives are protesting the proposed estate tax provisions of President Obama’s negotiated package. Without any action by Congress, the estate tax will return to its 2001 rates beginning January 1, 2011. The 2001 rates have a flat tax up to 55% of any net estate value over $1 million. For example, under the 2001 estate tax rates, an individual’s net estate of $2 million would likely incur an estate tax of approximately $500,000.

Under President Obama’s negotiated plan, individuals would receive a $5 million exclusion amount that would pass tax-free to heirs and beneficiaries, or if married $10 million would pass tax-free. Any amount over $5 million per person would incur a flat tax of 35%. For example, under this plan an individual’s net estate of $6 million would likely incur an estate tax of approximately $350,000 (because the first $5 million is tax-free, and the remaining $1 million is taxed at a flat tax of 35%). Additionally, under the plan, if a married couple had a net estate of $12 million, then the first $10 million would pass tax-free, and the remaining $2 million would be subject to a flat tax of approximately $700,000 (assuming the married couple properly set up an estate plan to ensure both $5 million exclusion amounts could be used).

In contrast, under the House Democrats plan, individuals would receive a $3.5 million exclusion amount, and married couples a $7 million exclusion amount, and the any amount over those values would be subject to a flat tax of 45%. Using the same examples under the President’s and the Republican’s plan (referenced above) evidences the differing estate tax impact between the two plans: An individual with a net estate of $6 million would likely incur an estate tax of approximately $1.125 million under the House Democrats plan. A couple with a net estate of $12 million would likely incur an estate tax of approximately $2.250 million.

There is not much time to fix the estate tax before the Republicans take control of Congress on January 4, 2011. Hopefully a package will be passed before January 1, 2011 so individuals will know how they may be impacted by the estate tax.