February 2013 (with updates through to 2015) — This entry discusses the Federal estate tax and certain changes brought about by the American Taxpayer Relief Act of 2012.
The American Taxpayer Relief Act of 2012 ("American Taxpayer Relief Act") was signed into law by President Obama on January 2, 2013. The American Taxpayer Relief Act modified and made permanent certain provisions of prior Acts that dealt with the Federal estate tax: the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), which was set to expire on December 31, 2010, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Tax Act"), which extended and modified provisions of EGTRRA, and which was set to expire on December 31, 2012.
Beginning in 2002, EGTRRA gradually reduced the Federal estate tax rate and increased the amount of the Federal exclusion in steps. Under EGTRRA, in 2010, the Federal estate tax would have been repealed entirely. Under EGTRRA's "sunset" provisions, the pre-EGTRRA 55% estate tax rate and a $1 million exclusion were scheduled to return in 2011.
The 2010 Tax Act revived the Federal estate tax for decedents dying after December 31, 2009. However, the maximum tax rate was lower (35%) and the exclusion amount was higher ($5,000,000) than the amounts that would have been applied under the scheduled EGTRRA expiration. The $5 million basic exclusion is adjusted for inflation after 2011. These rates and exclusion amounts were scheduled to expire on December 31, 2012.
The American Taxpayer Relief Act provides for a maximum Federal estate tax rate of 40% for decedents dying after December 31, 2012, and continues the $5 million basic exclusion, plus inflation adjustments, for tax years after 2011. Unlike the prior laws, these rates and amounts are not scheduled to expire.
Summary of Federal Estate Tax Exclusions and Maximum Rates
The following is a summary of Federal estate tax basic exclusions and maximum rates:
* The 2010 Tax Act gave estates of decedents dying in 2010 the option to choose between the revived estate tax and the prior (EGTRRA) tax law. These estates have the option to elect either: (1) the new estate tax, based upon the new 35% maximum rate and the $5 million exclusion, with a stepped up basis for property in the estate, or (2) no estate tax, and the required application of modified carryover basis rules under EGTRRA.
The 2010 Tax Act provided for the "portability" of the Federal estate tax exclusion between spouses. Portability permits spouses to aggregate each spouse's Federal estate tax exclusion. A surviving spouse may elect to add the unused portion of a deceased spouse's estate tax exclusion (the "Deceased Spousal Unused Exclusion") to the surviving spouse's estate tax exclusion, thereby providing the surviving spouse's estate with a larger applicable exclusion amount. Portability is available only to estates of decedents where both spouses died after December 31, 2010, and only if an election is made on a timely filed estate tax return of the predeceased spouse.
Under the 2010 Tax Act, the portability provision was set to expire on December 31, 2012.
The American Taxpayer Relief Act made spousal portability of the Deceased Spousal Unused Exclusion permanent.
State Death Tax
Prior to January 1, 2005, a credit was allowed against the Federal estate tax for any state death, estate or inheritance taxes paid to any state or the District of Columbia. Beginning on January 1, 2005, EGTRRA replaced the state death tax credit with a deduction for death taxes actually paid to any state or the District of Columbia. The deduction was set to expire on December 31, 2010. The 2010 Tax Act extended the deduction for actual state estate taxes paid until December 31, 2012.
The American Taxpayer Relief Act made the deduction for state estate taxes permanent.
As a reminder, state estate tax rates and thresholds vary. There can be state taxes owed even if there is no Federal estate tax owed.
Implications for Federal Estate Tax Returns
Due to the increased Federal exclusion amount, fewer estates will be subject to Federal estate tax and a potentially larger number of estates will not be required to file a Federal estate tax return: Form 706; United States Estate (and Generation-Skipping Transfer) Tax Return. However, any estate valued at more than the basic exclusion amount for the year of death must file a Federal estate tax return even if no Federal estate tax will be owed after applicable exclusions and deductions are applied. Any estate applying to make use of a Deceased Spousal Unused Exclusion must also file an estate tax return.