Estate Tax, Gift Tax, and GST Tax Exemptions and Rates 1987—Present
These tax rates and exclusions have undergone several changes over the years
The federal estate tax has been around in some form or another since 1916. Beginning in 1997, the estate tax, gift tax, and generation-skipping transfer (GST) tax exemptions began creeping upward, becoming more generous to taxpayers. Then, in 2002, they began sliding down again. All this activity has been due to numerous acts approved by Congress over the years.
The Economic Growth and Tax Relief Reconciliation Act
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was signed into law in June 2001.
In addition to significant income tax cuts, it gradually phased out the federal estate tax until it disappeared for a single year in 2010.
It was replaced by modified carryover basis rules during this time. The cost basis of inherited property could be stepped up by $1.3 million under these new rules, as opposed to an unlimited step-up in basis under prior estate tax laws. In addition, if property was inherited by a surviving spouse either directly or through a qualified terminable interest property (QTIP) trust, the property could receive an additional $3 million step-up in basis.
EGTRRA was slated to "sunset" or expire on December 31, 2010, which meant that the estate tax would return in 2011 based on the laws that were in place going back all the way to 2001. But the estate tax came back under the terms of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRUIRJCA) instead.
The Tax Relief, Unemployment Insurance Reauthorization and Job Creaction Act
TRUIRJCA was signed into law at the eleventh hour on December 17, 2010, and it applied retroactively to the estates of decedents who died between January 1, 2010 but before December 31, 2010.
This legislation gave the heirs of decedents who died during this time a choice.
They could either use the modified carryover basis rules or they could apply 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 percent and they did away with the GST tax completely. TRUIRJCA also provided that each of the exemptions would be indexed for inflation beginning in 2012, which increased them to $5.12 million at that time.
Heirs of 2010 decedents who wanted to opt into the modified carryover basis rules and out of the estate tax rules were required to file a new IRS form, Form 8939, Allocation of Increase in Basis for Property Received from a Decedent.
TRUIRJCA also introduced a new tax concept: portability of the estate tax and gift tax exemptions between married taxpayers. The surviving spouse of a decedent who died in 2011 or 2012 could add any part of exemption unused by her deceased spouse to her own exemption. This required filing a federal estate tax return, IRS Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, so she could make the portability election.
The American Taxpayer Relief Act
TRUIRJCA was supposed to be in effect for only two years, which meant that the federal estate tax exemption and the tax rate would default to the laws that were in effect in 2001 on January 1, 2013.
But Congress passed the American Taxpayer Relief Act (ATRA) on January 1, 2013 and President Obama signed this act into law on January 2 of that year.
ATRA made the changes to the laws governing estate taxes, gift taxes, and GST taxes under TRUIRJCA permanent with one exception: The applicable tax rates for each type of transfer tax was increased from 35 percent to 40 percent.
The Tax Cuts and Jobs Act
President Donald Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. In addition to other sweeping tax law changes, the TCJA increased the federal estate tax exemption to $10 million, and this increase is also indexed for inflation. This means it could potentially go as high as $11.2 million by the time the TCJA expires in 2025. A married couple could shield twice this amounts from taxation.
State Death Taxes
Aside from federal transfer taxes, a handful of U.S. states also collect a death tax at the state level. In some states, the tax is based on the overall value of the estate, and this is referred to as the estate tax. In other states, the tax is based on who inherits, and this is referred to as an inheritance tax.
Historical and Current Federal Transfer Tax Exemptions and Rates Through 2015
|Year||Estate Tax Exemption||Estate Tax Rate||Gift Tax Exemption||Gift Tax Rate||Annual Exclusion||GST Exemption||GST Rate|
|2010||$0 or $5,000,000||0% or 35%||$1,000,000||35%||$13,000||No GST tax||0%|
The exemption amount increased to $5,45 million in 2016, then to $5.49 million in 2017. The tax rate remained at 40 percent, and the annual exclusion remained at $14,000.
Beginning in 2018, the exemption increases to $10 million under the terms of the TCJA passed in December 2017, and will hold there until at least 2025. The tax rate stays at 40 percent, but the annual exclusion increases to $15,000 in 2018.