Estate Tax, Gift Tax, and GST Tax Exemptions and Rates 1987—Present
These tax rates and exclusions have undergone several changes over the years
In 2001, the 107th U.S. Congress passed The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which was signed by President George W. Bush, creating some of the most sweeping tax legislation in the nation's history. Known as the first of two "Bush tax cuts" the Act radically altered several areas of the U.S. Internal Revenue Code. In addition to introducing significant income tax cuts, it gradually phased out the federal estate tax, until it disappeared for a single year in 2010, when it was replaced by modified carryover basis rules.
Simply explained, with this model, the cost basis of inherited property could be augmented by $1.3 million, as opposed to an unlimited step-up in basis, under prior estate tax laws. Furthermore, if a property was inherited by a surviving spouse–either directly or through a qualified terminable interest property (QTIP) trust, the property may receive an additional $3 million step-up in basis.
EGTRRA was slated to expire on December 31, 2010, which meant that starting in 2011, the estate tax would revert to 2001 levels. However the estate tax fell under new guidelines dictated by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRUIRJCA)--a measure signed into law at the eleventh hour, on December 17, 2010, which was retroactively applied to the estates of decedents who died between January 1, 2010 and December 31, 2010. This legislation gave the heirs of decedents who died during this time the choice of either using the modified carryover basis rules, or applying the new estate tax rules, which bumped the estate tax and gift tax exemptions up to $5 million.
The new rules also reduced the applicable tax rates to 35%, while abolishing the GST tax completely.
The chart below illustrates the lifetime gift tax exemption and how it's grown from 2000–2018.
Heirs of 2010 decedents looking to opt into the modified carryover basis rules and opt out of the estate tax rules, were required to file the newly created IRS Form 8939, entitled: Allocation of Increase in Basis for Property Received from a Decedent.
The chart below illustrates the changes in the estate tax rate from 2000–2018.
TRUIRJCA also introduced portability of the estate tax and gift tax exemptions between married taxpayers, where a surviving spouse of a decedent who died in 2011 or 2012, could add any part of the exemption unused by her deceased spouse, to her own exemption calculation. This required filing IRS Form 706, entitled the United States Estate (and Generation-Skipping Transfer) Tax Return.
The American Taxpayer Relief Act
TRUIRJCA was supposed to remain in effect for just two years, meaning that on on January 1, 2013, the federal estate tax exemption and the tax rate would default back to 2001 rates. However on January 1, 2013, Congress passed the American Taxpayer Relief Act (ATRA), which President Barack Obama signed into law, on January 2 of that year. ATRA made permanent, the changes to the laws governing estate taxes, gift taxes, and GST taxes under TRUIRJCA. There was one exception: applicable tax rates for each type of transfer tax were increased from 35% to 40%.
The Tax Cuts and Jobs Act
On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act into law, which increased the federal estate tax exemption to $10 million. But this figure is indexed for inflation, meaning that it could potentially spike as high as $11.2 million, by the time the TCJA expires in 2025.
State Death Taxes
Aside from federal transfer taxes, some U.S. states also collect a death tax at the state level known as "the estate tax", as it is based on the overall value of an estate. In other states, the tax is based on the recipient of the inheritance, and is consequently referred to as an inheritance tax.