Estate Tax

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The estate tax has gotten a lot of press this year because, well, it doesn’t exist this year and Congress is set to discuss what they want to do with it, along with tax rates, in subsequent years.

However, before we get into that, let’s get back to basics – what is the estate tax? The estate tax is a tax imposed on the transfer of an estate. That is, it’s a tax on assets when someone dies and transfers those assets to others. It’s imposed by the federal government and oftentimes by the state government as well, which can refer to it as an estate tax or an inheritance tax. No matter what you call it, or how you feel about it in terms of fairness, it’s a tax that has been collected for years and is a source of revenue to federal and state governments.

2011 Estate Tax Changes

With the passage of the tax bill, the estate tax rates will be changing from what’s listed below. I’ll update the table below as soon as the official numbers are released. In summary, the exclusion will increase to $5 million per person and the top rate will be reduced to 35% (from the 55% listed below).

Estate Tax Rates

As it stands, there is no estate tax for 2010 but in 2011 they will return to 2001 rates. Those rates were:

Gross Estate Tax Rate
Up to $10,000 18%
$10,000 – $20,000 20%
$20,000 – $40,000 22%
$40,000 – $60,000 24%
$60,000 – $80,000 26%
$80,000 – $100,000 28%
$100,000 – $150,000 30%
$150,000 – $250,000 32%
$250,000 – $500,000 34%
$500,000 – $750,000 37%
$750,000 – $1,000,000 39%
$1,000,000 – $1,250,000 41%
$1,250,000 – $1,500,000 43%
$1,500,000 – $2,000,000 45%
$2,000,000 – $2,500,000 49%
$2,500,000 – $3,000,000 53%
$3,000,000 and greater 55%

Congress is going to be tackling this issue in the coming months and I’d expect these numbers to change.

Applicable Exclusion Amount

According to the chart above, every dollar in the estate is taxed. Fortunately, the IRS is not without heart as there is an “applicable exclusion amount.” That amount is deducted from the gross estate for taxation purposes. The amounts are and were:

  • 2006-2008: $2,000,000
  • 2009: $3,500,000
  • 2010: No estate tax
  • 2011: $1,000,000

For for 2011, the first $1,000,000 of an estate is not subject to an estate tax. Each dollar after the first million will be taxed at the schedule listed above.

That’s the estate tax in a nutshell, at least how it looks today, and it’s something that isn’t too tricky to understand once you get over the messiness that is death. It’s become a hot topic this year since anyone who dies this year will pass along their estate tax free. It’s a bit morbid reading news articles that talk about how “lucky” someone is for dying this year. 🙂

{ 28 comments, please add your thoughts now! }

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28 Responses to “Estate Tax”

  1. Richard says:

    So do I understand correctly that the first 11 tiers of taxation are possibly taxed at a state level but not the federal level, since the IRS has an exclusion on the first $1,000,000 of an estate? (That is, at the 2011 exclusion amount) And therefore since the estate would be worth less than $1,000,000 in the first 11 tiers it would not be taxed at the federal level?

    • Jim says:

      I understand it to mean that the tiers kick in after the $1,000,000 exclusion.

      • billsnider says:

        That is my understanding as well.

        Bill Snider

        • char says:

          I am thinking of purchasing a property in Florida.
          If I should die, is all my estate taxed ( even my assets in Canada)?
          If so, is there anyway to purchase a property without this high tax. What if one set up a trust is the U.S.?

  2. Shirley says:

    For the very first time ever, I am glad that my estate is not over four million! 😉

  3. Ross says:

    I’ve never understood the estate tax and will continue to believe it is one of the biggest scams of the United States government. If my family member has paid for their estate for the past 30 years – including the taxes and the mortgage – why should the government have the right to then tax the inheritors additionally on top of that? How is that even constitutional?

    I’ve heard several individual stories about how someone’s parents have passed away and the family members are forced to sell the property away. This is especially common in farmland, where the price of the farm is several million and the inheritors can’t pay the millions in taxes.

    Please enlighten me, Jim, on why people think this is an OK thing?

    • Jim says:

      I’ve never thought the estate tax was fair either, since income tax was paid the first time around (though as many have pointed out, we’re double taxed all the time), but I think people think it’s an OK thing because most people don’t pass on large estates. Is that right? No, but that’s how things work.

    • NateUVM says:

      I hear all the arguements against the estate tax, and, based on their logic, those arguements make a lot of sense to me.

      The rationalization that I use to reconcile the estate tax within the broader American philosophy of taxation is to think of taxes as being levied on people based on how/when they obtain and spend it.

      In the case we are discussing here, what should it matter that the person who gave you money was a relative? I mean, do we ever question taxation of income when the money was given to us by an employer? Or when as interest from a bank?

      And the thought that it’s double-taxation doesn’t quite fly with me either… Is it double taxation when someone buys something and sales tax is paid. Then the business that sold that taxed item pays its employees where the money taxed again… Is that double-taxation?

      Again, just a rationalization, and not one that I necessarily agree with, either. I just don’t see the estate tax as being all that “bad,” either, I guess. I mean, we get taxed on every other means of “getting” money (earning, interest, dividents, etc…), why not this one?

      • live green says:

        I see it as double-taxing. You save money your entire life and pass it onto your relatives. You paid your taxes on that particular money once when you first received that money. You are forced to then again pay taxes on it when you pass it on. It seems pretty obvious that this is double taxation. Just as sales tax is a double tax since you already paid tax on it.

        I think that is a bad mentality to have in terms of this not being that “bad”. Your statement about getting money is wrong in that you are not technically earning money. It was given to you by your own family members that they earned and paid taxes already on. I don’t know about you, but I don’t like being taxed on everything and especially something that I already paid taxes on.

        • NateUVM says:

          I agree with most of where you are coming from. The problem I have is your last statement… You DIDN’T already pay taxes on it… Your benefactor did.

          Maybe I’ve gone too far down the line of complacence, but I accept taxation as part of my responsibility in living in a civilized society. As such, I’ve become accustomed to not getting something for free.

          And again, I’m not sure that any of what I am pointing out is enough or even a good reason to have estate taxes. I just think that the negative reaction to them is a bit over-wrought.

      • James says:

        It matters in the cases where the family farm/business needs to be broken up or sold off just so the inheritors can pay their tax bill.

        I guess there are ways around with by setting up a corporation or whatever. But it just doesn’t seem fair when you get burned by the tax man because you didn’t pay a lawyer a bunch of money to find a loophole around it.

        • NateUVM says:

          Again, if the person who was running the business didn’t set it up that way…then maybe that’s not what they wanted. Guess it sounds like a raw deal, but like you said, there are ways to get around it.

      • papa65 says:

        This tax is the biggest rip off of all of the taxes. Why should I have worked for 40 years on a 4th generation farm, and desire it to go to the 5th generation (3 of them), have paid income and property taxes all those years, built equity for going from one family to three operating it and now, if I die next year and there are no changes in the law, they will have to liquidate 1/2 to pay estate taxes, two of the three will have to leave the business, probably go on unemployment due to todays marketplace.
        Wow, we have been productive, something this country isn’t anymore and they want to take that away. Those of you who are proponents of the estate tax don’t understand that it can destroy families.

  4. freeby50 says:

    As long as there is a $1M or more exemption then the estate tax is fine. I don’t see why inheriting multi-million dollar estates should be tax free. Most of the money inherited from large estates has NOT been taxed previously since its in the form of capital gains which has appreciated without taxes. My wife’s grampa has a multi-million estate. He has not paid taxes on those millions. He started business decades ago and it grew and appreciated in value. Billionaires like Bill Gates or the WAlmarts have not paid taxes on their billions. For operating businesses and farms, I do think that if an estate has liquidity problems then they should be allowed to pay estate taxes in the form of a loan over time, but that really only impacts maybe 1% of the estates. For every “small” multi-million dollar farm in the country with liquidity problems theres a Paris Hilton set to inherit a vast estate and skip all taxes.

    • zapeta says:

      I agree with you. Plus, honestly, the rich are great at sheltering assets from estate taxes so its doubtful that having to pay estate taxes is a huge burden on them.

      • cubiclegeoff says:

        Agreed. Plus, not everyone in the higher income arena think it’s a bad idea. Warren Buffet thinks the estate tax is important to keep.

  5. freeby50 says:

    Also, there is something called the Qualified Family-Owned Business-Interest Deduction which gives small family businesses an extra deduction for estate taxes if the business is kept in the family.

  6. billsnider says:

    A very timely post.

    I recently took an airplane trip with my wife. I began to wonder what my estate, IRA account, savings and home taxes would be if we went down. I was surprised to calculate that the federal and state government where I live would take a whopping 66% of my estate! This is based on a $1,000,000 feredal deduction and the current tax rates. If taxes go up next year, this percentage will go up as well.

    I am now doing the following….

    1) I am now passing on to my kids larger gifts to reduce my estate tax free.

    2) I started to take my IRA MRD. I will also take a larger than required distribution up to the next tax bracket. This works out to be less in taxes. Keep in mind that I am over 65.

    3) I will move out of the state where I live in the near future to one that does not have a state income and estate tax. The current combined tax rate for the state i live in is 25% of my estate!!!!

    Note to anyone thinking along these lines (#2). Be careful of the medicare income limit of $85,000 for an individual and $170,000 for a joint return. There is a premium on your income.

    also keep careful records covering any money put into your home. I am concerned that the goverment will reduce the current deduction.

    Bill Snider

  7. Evan says:

    While the results are basically the same it works a little different.

    How it works is that the government gives you the credit on the front end. So the $1mil exemption is really $345,000 in tax paid. Essentially you are pushed into the highest tax bracket.

    On top the Federal Estate Tax there are 18 states that have their own estate tax.

    So in New York for example in tax year 2009 if you died with $3.5mil you would have owed nothing to the Federal Government, but you would have had to written a check to New York State for $227,000.

    The Estate Tax keeps me employed, but I am not a huge fan of it for the reasons people listed above.

  8. Shckr7 says:

    I have never heard a reasonable argument for an estate tax. We feel bad for the poor farmer who may need to sell part of the family farm, but we don’t feel bad about people inheriting a business and the need to sell part or all of the business when it is passed on? What’s the difference? (I love how people get this idea of the family farm in their minds. I’m from Iowa – this is an idea of the past. It seems people all conjur images by Grant Wood, I guess.)

    I have heard many make comments like “Yeah, anything above $1M is fine.” Why? “Oh, because my estate won’t be more than $1M.” If their estate is ~$2M – well, then the limit should be anything above $2.5M, of course…..

    • NateUVM says:

      What about the fact that this is money/inheritance that you are receiving that you havn’t paid any taxes on? I mean, we have to pay sales tax on automobiles we buy used from someone else, even if it’s from family members that have already paid sales taxes on themselves….? So, again, I don’t see why estates should be any different.

      Am I advocating FOR estate taxes OR sales tax on used autos? No. I’m just saying that this is the argument.

      • Shckr7 says:

        I’m not sure how this can be considered untaxed. The individual who grew the estate paid taxes. Assuming everything is on the up-and-up, which for this discussion should be the case (otherwise we have a different argument). How is that not paying taxes? When the business grew – they paid taxes. If the estate is in stocks – when the individual sells the stocks then they will pay taxes on the delta between their cost basis and the final value. How is that not paying taxes? Just because someone dies and the money is transferred from one account to another does not constitute a reason to take near 50% of that individual’s money way.

        When teh farmer sells land or makes money on the crop – they will pay taxes.

        If their business continues to do well – they will continue to pay taxes. If they sell their assets and take capital gains – they will pay taxes. What am I missing?

        • NateUVM says:

          But we’re not talking about the money merely changing accounts, as you put it. We’re talking about it transferring from one person to another. And, typically, you sill see that type of movement of money taxed.

          You say, “just because someone died.” Well, that seems to me to be a BIT more of a major event than the simple sale of goods, which is an event that is taxed.

          What you are missing, in the end, is that the person that inherits the money has never been taxed. Just because you weren’t taxed on the $10 allowance that Mom and Dad gave you when you were a kid doesn’t mean that you shouldn’t be taxed on any inheritance over $1million.

          Again, not saying that I agree with it all… But that’s the rationale.

          • Shckr7 says:

            Hello Nate,

            I understand what you are saying. I just simply can’t see the logic in it. I get that there are a whole ton of people salivating on a way to get their hands on other people’s money. This much is clear.

            But again, that money WILL be taxed and HAS BEEN taxed already – as detailed in my comments above.

            Taking away 40% of someone’s estate because they lost a loved one, just seems extreme to me. Additionally, my opinion, if you are going to tax an estate (something I obviously disagree with….) then tax it for EVERYBODY. Do not put some artificial limit on it and claim it to be a tax on the wealthy.

            This whole thing doesn’t really apply to me. I stand to inherit debt more than any income from my family…. 🙂

  9. Question: If I inherit an estate, do I pay individual income taxes on the amount left after taxes are paid?

    • Arcade says:

      One thread of thinking above has been that the person inheriting the estate is taxed. That’s not technically correct. The deceased’s estate is the one that files the estate tax return and pays tax based on the current net value of their assets. What is left after taxes the deceased pays (if any) and that goes to the next of kin is never taxed. Inherited income is not taxed.

  10. Denning says:

    So now the question is should an individual, aged 94, with about $8,000,000 in assets, take the initiative and GIFT about $4,500,000 to heirs this year and get taxed at the 35% gift tax rate, and leave about 3.5 million for “hopefully” a future tax law that might “revert” to the 3.5 million that can be passed on tax-free upon death? The 35% rate sure looks good, but it is hard to know what to do without a good crystal ball…

  11. roommate says:

    I would try to spend all my money or give it to charity than to have the government steal it when i die.

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