Exemption From Federal Estate Taxes: 1997 - 2017

Estate Tax Thresholds and Portability

Close up of stacks of 100 dollar bills
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Estate taxes don't affect everyone. In fact, it's estimated that only about one of every 517 estates will pay the tax in 2017. The federal government offers an exemption that allows estates under a certain value to pass property to heirs tax free. 

This exemption has increased significantly since 1997, while the estate tax rate has significantly decreased. Below is a chart that shows the changes in the estate tax exemption and estate tax rate from 1997 through 2017.

How the Exemption Works

The gross value of your estate must exceed the exemption amount for the year of your death before estate taxes become due, and then only the value over the exemption is taxable. For example, the 2017 exemption is $5.49 million, so if you die with an estate valued at $5,490,020, only $20 is taxed. The first $5.49 million is exempt. 

The government also allows you to transfer any unused portion of your exemption to your spouse if you're married. This is called "portability." If your estate is worth $5 million, you'd have a $490,000 of your exemption left over. You can give this to your spouse. Presumably, she inherited most if not all of that $5 million in property from you. Her estate is also entitled to an exemption in the year she dies, and she can increase her exemption by the amount of your transfer to shield even more property from taxation as it passes to your heirs.

Your estate must file a tax return to make the transfer, even though no taxes are due. 

Recent Changes in Federal Estate Tax Laws

Tax years 2010 through 2012 are based on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act signed into law by President Obama on December 17, 2010.

This law was only good for two years. It was supposed to "sunset" or expire on December 31, 2012, so the federal estate tax exemption and rate would default to the numbers that were in effect in 2001/2002 on January 1, 2013.

But that didn't happen. Congress passed the American Taxpayer Relief Act ("ATRA" for short) on January 1, and President Obama signed it into law on January 2, 2013. ATRA makes permanent changes to the laws governing federal estate taxes, gift taxes, and generation skipping transfer taxes.  

State Death Taxes

Aside from federal estate taxes, a handful of U.S. states also collect a death tax as well. This tax is based on the overall value of the estate in some states and is referred to as an estate tax. In other states, the tax is based on the value of individual inheritances. This is referred to as an inheritance tax. Technically, estates are responsible for paying the estate tax and beneficiaries pay the inheritance tax on their own bequests, although estates' executors often voluntarily pick up the tax tab for their beneficiaries. 

Historical and Future Federal Estate Tax Exemptions and Rates

Here's how the estate tax has broken down over the years: 

YearEstate Tax ExemptionTop Estate Tax Rate
1997$600,00055%
1998$625,00055%
1999$650,00055%
2000$675,00055%
2001$675,00055%
2002$1,000,00050%
2003$1,000,00049%
2004$1,500,00048%
2005$1,500,00047%
2006$2,000,00046%
2007$2,000,00045%
2008$2,000,00045%
2009$3,500,00045%
2010$5,000,000 or $035% or 0%
2011$5,000,00035%
2012$5,120,00035%
2013$5,250,00040%
2014$5,340,00040%
2015$5,430,00040% 
2016$5,450,00040%
2017$5,490,00040% 

 

The heirs of decedents who died in 2010 had a choice. They could use the $5,000,000 estate exemption at the 35 percent estate tax rate, or they could elect to use $0 estate tax exemption at a 0 percent tax rate, coupled the use of modified carryover basis rules.