Current & Historical Federal Estate Tax Structure, Exemptions & Rates

1/2/2013 - The U.S. Federal Estate Tax exemption and rate were permanently modified by the Taxpayer Relief Act of 2012.

Many people with whom we meet are often quite suprised when we tell them that their estates will not likely be subject to the federal estate tax, which is actually called the federal estate & gift tax. This is due, in large part, to the structure of the federal estate tax and the changes in both the effective federal estate tax exemption over the last 90-plus years.

The federal estate tax only applies to those estates whose value is in excess of a specific amount, often called the federal estate tax exemption. If the estate's value is less than the federal exemption amount, it is not subject to the federal estate tax. However, if the estate's value is above the federal exemption amount, any amount above the exemption is taxed at one or a series of rates.

Current Exemption & Rate

As of today, the federal estate tax exmeption amount is $5,120,000 per person or $10,240,000 per married couple. Any amount in excess of such exemptions is subject to a top rate of 35%.

If, however, the U.S. Congress does not enact legislation, which President Obama also signs into law, the federal estate tax exemption will decrease to $1 million and the top rate will increase to 55% for estates of those who die in 2013.

Historical Exemptions & Rates

Historically, the federal estate tax has applied to a larger percentage of the U.S. population than it does in 2012. To put the changes into perspective, the following table illustrates the historical changes in both the estate exemption and the estate tax rate:

Year Exemption (dollars) Top Rate (percent)
1916 50,000 10.0
1917 50,000 25.0
1918-1923 50,000 25.0
1924-1925 50,000 40.0
1926-1931 100,000 20.0
1932-1933 50,000 45.0
1934 50,000 60.0
1935-1939 40,000 70.0
1940 40,000 70.0
1941 40,000 77.0
1942-1976 60,000 77.0
1977 120,000 70.0
1978 134,000 70.0
1979 147,000 70.0
1980 161,000 70.0
1981 175,000 70.0
1982 225,000 65.0
1983 275,000 60.0
1984 325,000 55.0
1985 400,000 55.0
1986 500,000 55.0
1987-1997 600,000 55.0
1998 625,000 55.0
1999 650,000 55.0
2000-2001 675,000 55.0
2002 1,000,000 50.0
2003 1,000,000 49.0
2004 1,500,000 48.0
2005 1,500,000 47.0
2006 2,000,000 46.0
2007 2,000,000 45.0
2008 2,000,000 45.0
2009 3,500,000 45.0
2010 Repealed
2011 5,000,000 35.0
2012 5,120,000 35.0
2013 - 5,000,000 (indexed for inflation) 40.0

SOURCE: http://www.irs.gov/pub/irs-soi/ninetyestate.pdf

While inflation has certainly occured over the last 90-plus years, the rate of such inflation is far less than the rate by which the estate tax exemption has increased, on average, over the same 90-plus year period.

This brief overview of some important considerations associated with the the federal estate and gift tax is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.

Arizona AttorneyDouglas K. Cook is an attorney with over 40 years of experience. Although Cook & Cook's office is located in Mesa, Arizona, the attorneys at Cook & Cook represent clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.

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