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What Is the
Estate Tax?
The estate tax is a tax
on property that transfers to others
upon your death. Estate taxes are due on
the total value of your estate — your
home, stocks, bonds, life insurance, and
other assets of value. Everything you
own, whatever the form of ownership,
regardless of whether the assets have
been through probate, is subject to
estate taxes.
Also referred to as the
“death tax,” the estate tax was first
enacted in this country with the Stamp
Act of 1797 to help pay for naval
rearmament. After several repeals and
reinstatements, the Revenue Act of 1917
put the current estate tax into place.
Despite its long history, this tax
remains controversial.
By working in much the
same way as marginal income tax
brackets, estate taxes claim a graduated
percentage of the total value of your
estate. For estates of greater value,
the percentage amount due in taxes is
generally higher.
The IRS calculates the
estate tax due on your gross taxable
estate by adding the value of your
assets and then subtracting any
applicable exemptions.
The most common exception
to the federal estate tax is the
unlimited marital deduction. The
government exempts all transfers of
wealth between a husband and wife from
federal estate and gift taxes,
regardless of the size of the estate. Of
course, the surviving spouse must be a
U.S. citizen to qualify for this
exemption. When the surviving spouse
dies, the estate will be subject to
estate taxes and, unless the appropriate
preparations have been made, only the
surviving spouse’s applicable credit can
be used. Other exemptions include
mortgage and other debt, administration
expenses of the estate, and losses
during estate administration.
The Economic Growth and
Tax Relief Reconciliation Act of 2001
made sweeping changes to the federal
estate tax. It established a schedule
that loweredthe top estate tax rate and
raised the applicable credit amount
gradually over several years. In 2010,
the federal estate tax is scheduled to
be repealed. However, because of the tax
law’s sunset provision, the federal
estate tax will return in 2011 at its
previous maximum level unless Congress
votes to permanently repeal the tax.
(See the table for applicable credit
amounts and top estate tax rates.)
|
Year
|
Applicable Credit
|
Top
Estate Tax Rate
|
|
2006
|
$2 million
|
46%
|
|
2007
|
$2 million
|
45%
|
|
2008
|
$2 million
|
45%
|
|
2009
|
$3.5 million
|
45%
|
|
2010
|
Tax repealed
|
0%
|
|
2011
|
$1 million
|
50%
|
Check with your tax
advisor to be sure that your estate is
protected as much as possible from
estate taxes upon your death.
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Is
the Estate Tax Going
to Be Repealed?
The
short-term answer is
“yes.” The Economic
Growth and Tax
Relief
Reconciliation Act
of 2001 made
sweeping changes to
the federal estate
tax and eliminated
the tax entirely in
2010.
However, because the
tax legislation is
scheduled to expire
after December 31,
2010, the federal
estate tax will
return to its
original 50% maximum
rate in 2011 unless
Congress acts to
make the repeal
permanent.
Estate taxes are
levied by the
federal government
and several states
on any property that
passes from the dead
to the living. All
estate assets are
subject to federal
estate taxes.
However, the
applicable credit
shelters a portion
of an estate from
federal estate
taxes.
The
following table
illustrates changes
to the applicable
credit and the top
federal estate tax
rate from 2002
through 2011.
|
Year
|
Applicable
Credit
|
Top Estate
Tax Rate
|
|
2002
|
$1 million
|
50%
|
|
2003
|
$1 million
|
49%
|
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2004
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$1.5 million
|
48%
|
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2005
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$1.5 million
|
47%
|
|
2006
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$2 million
|
46%
|
|
2007
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$2 million
|
45%
|
|
2008
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$2 million
|
45%
|
|
2009
|
$3.5 million
|
45%
|
|
2010
|
Tax repealed
|
0%
|
|
2011
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$1 million
|
50%
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