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Estate Tax

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 [3], 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 [4], 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:

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 [5]. It’s a bit morbid reading news articles that talk about how “lucky” someone is for dying this year. 🙂