How the Federal Estate Tax Exemption Changed From 1997 to Today
Estate taxes have affected fewer and fewer people over time. Only 1,900 of an estimated 4,100 estates were expected to be taxable in 2020, according to the Tax Policy Center. This was less than 0.1% of the estimated 2.7 million people expected to die that year. The percentage is so low because the federal government offers a generous estate tax exemption.
The exemption allows estates under a certain value to pass property to heirs tax-free. This threshold for when the tax kicks in has increased consistently since 1997, while the estate tax rate has decreased or held steady.
How the Exemption Works
The gross value of your estate must exceed the exemption amount for the year of your death before estate taxes will come due. Even then, only the value over the exemption threshold is taxable.
The 2020 exemption is $11.58 million, up from $11.4 million in 2019. The first $11.58 million of your estate is therefore exempt from taxation. Your estate wouldn't be subject to the federal estate tax at all if it's worth $11.58 million or less and you died in 2020.
The IRS announced in October 2020 that the estate tax exemption will increase to $11.7 million for tax year 2021. The exemption is indexed for inflation so it tends to increase somewhat annually, even when tax legislation doesn't affect it.
The estate tax rate is 40%, but this is lower than the 45% that was applied in 2009.
The estate tax remains a very progressive tax because it is paid by only the wealthiest households.
The Exemption Is Portable
The government also allows your estate to transfer any unused portion of your exemption to your spouse if you're married. This provision is referred to as "portability."
For example, you would have $5.7 million of your exemption "left over" in 2021 if your estate was worth $6 million and with the exemption set at $11.7 million. You could effectively give this portion of the exemption to your spouse, increasing their exemption by that amount when they die.
Presumably, your spouse will inherit most, if not all, of your $6 million in property, so this allows them to pass that property to heirs tax-free at the time of their own death. The estate is also entitled to an exemption in the year your spouse dies, and your unused exemption is added to that amount.
Your estate must file an estate tax return to let the Internal Revenue Service know that you're making this transfer, even though no taxes are due.
History of Federal Estate Tax Laws
The landmark Taxpayer Relief Act of 1997 called for a gradual increase in the estate exemption from $600,000 in 1997 to $1 million by 2006. This set the stage for greater increases in years to come.
Estate taxes from 2010 through 2012 were based on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act that was signed into law by President Obama on December 17, 2010, but the law was only good for two years. It was supposed to expire, on December 31, 2012, so the federal estate tax exemption and rate would default to the previous number that was in effect.
This didn't happen. Congress passed the American Taxpayer Relief Act (ATRA) on January 1, 2013, and President Obama signed it into law on January 2, 2013. ATRA was intended to make permanent changes to the laws governing federal estate taxes, gift taxes, and generation-skipping transfer taxes.
Fast forward to President Trump, who signed the Tax Cuts and Jobs Act (TCJA) in December 2017. The exemption was only $5.49 million in 2017. The TCJA more than doubled that to $11.18 in 2018.
Tax Exemptions and Rates Over the Years
Here's how the estate tax has broken down over the years:
|Year||Estate Tax Exemption||Top Estate Tax Rate|
|2010||$5,000,000 or $0||35% or 0%|
The heirs of decedents who died in 2010 had a choice. They could use the $5 million estate exemption at the 35% estate tax rate, or they could elect to use the $0 estate tax exemption at a 0% tax rate, coupling the use of modified carryover basis rules.
The Exemption Can Decrease After 2025
The TCJA is not forever. It is slated to expire after 2025, and the exemption amount can revert to its pre-2018 level at that time unless Congress acts to renew the legislation or even some of its provisions.
Tax Policy Center. "Briefing Book: Key Elements of the U.S. Tax System." Accessed Nov. 1, 2020.
IRS. "Estate Tax." Accessed Nov. 1, 2020.
IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2021." Accessed Nov. 1, 2020.
Center on Budget and Policy Priorities. "Ten Facts You Should Know About the Federal Estate Tax." Accessed Nov. 1, 2020.
IRS. “Instructions for Form 706.” Pages 17-19. Accessed Nov. 1, 2020.
Public Law. "PL 105-34 Taxpayer Relief Act of 1997," Page 59. Accessed Nov. 1, 2020.
Congress.gov. "H.R.4853 — 111th Congress (2009-2010)." Accessed Nov. 1, 2020.
Congress.gov. “H.R.8 - American Taxpayer Relief Act of 2012.” Accessed Nov. 1, 2020.
Institute on Taxation and Economic Policy. "The Federal Estate Tax: An Important Progressive Revenue Source." Page 4. Accessed Nov. 2, 2020.
IRS. “What's New - Estate and Gift Tax.” Accessed Nov. 2, 2020.
IRS. ”Instructions for Form 706 (Rev. July 2011).” Page 1. Accessed Nov. 1, 2020.