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.
Douglas 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.
