How the Federal Estate Tax Exemption Changed From 1997 to Today
Estate taxes have affected fewer and fewer people over time. According to the Tax Policy Center, in 2020 only 1,900 of an estimated 4,100 relevant returns will be taxable. This is less than 0.1% of the estimated 2.7 million people expected to die this year.
The percentage is so low because the federal government offers a generous exemption that allows estates under a certain value to pass property to heirs tax-free. The threshold for when the tax kicks in has increased consistently since 1997, while the estate tax rate has significantly decreased.
What Happened in 1997
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.
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. Even then, only the value over the exemption is taxable. The exemption for 2020 is $11.58 million, up from $11.4 million in 2019. The first $11.58 million is exempt, so if your estate is worth $11.58 million or less, it would not be subject to federal estate tax at all.
The estate tax rate is 40%, but 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 you to transfer any unused portion of your exemption to your spouse if you are married. This is called "portability."
If your estate is worth $6 million, you would have $5.58 million of your exemption remaining, and you can give this to your spouse. This raises their exemption by that amount when they die.
Presumably, your spouse inherits most if not all of that $6 million in property, so this allows them to pass that property to any heirs tax-free. The estate is also entitled to an exemption in the year your spouse dies, and any unused exemption can be added to that amount.
Your estate must file an estate tax return to let the Internal Revenue Service know that you are making this transfer, even though no taxes are due.
Recent Changes in Federal Estate Tax Laws
Estate taxes from 2010 through 2012 were based on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act signed into law by President Obama on Dec. 17, 2010.
This law was only good for two years. It was supposed to "sunset," or expire, on Dec. 31, 2012, so the federal estate tax exemption and rate would default on Jan. 1, 2013 to the numbers that were in effect in 2001 and 2002.
That did not happen. Congress passed the American Taxpayer Relief Act (ATRA) on Jan. 1, 2013, and President Obama signed it into law on Jan. 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.
In addition to other sweeping tax law changes, the TCJA increased the estate tax exemption significantly.
The exemption was only $5.49 million in 2017. The TCJA more than doubled that, increasing it to $11.58 million for 2020.
Historical Estate Tax Exemptions and Rates
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.
Estate Tax Can Increase After 2025
The $11.58 million exemption for 2020 will remain in place and may even increase slightly from year to year because it is regularly adjusted for inflation. But the TCJA is not forever. It is slated to expire after 2025, and if nothing changes, the exemption amount is intended to revert to its pre-2018 level.
Tax Policy Center. "Briefing Book: Key Elements of the U.S. Tax System." Accessed June 7, 2020.
Public Law. "PL 105-34 Taxpayer Relief Act of 1997," Page 59. Accessed June 7, 2020.
Tax Foundation. “Federal Estate and Gift Tax Rates, Exemptions, and Exclusions, 1916-2014.” Accessed May 4, 2020.
IRS. "Estate Tax." Accessed June 7, 2020.
Center on Budget and Policy Priorities. "Ten Facts You Should Know About the Federal Estate Tax." Accessed June 7, 2020.
IRS. “Instructions for Form 706,” Pages 17-19. Accessed June 7, 2020.
Congress.gov. “H.R.4853 - Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” Accessed June 7, 2020.
Congress.gov. “H.R.8 - American Taxpayer Relief Act of 2012.” Accessed June 7, 2020.
Congress.gov. “H.R. 1.” Accessed June 7, 2020.
Congress.gov. “H.R.1 - An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018.” Accessed June 7, 2020.
IRS. “Instructions for Form 706,” Page 9. Accessed June 7, 2020.
IRS. “What's New - Estate and Gift Tax.” Accessed June 7, 2020.
IRS. ”Instructions for Form 706 (Rev. July 2011),” Page 1. Accessed May 4, 2020.
IRS. "Estate and Gift Tax FAQs." Accessed May 4, 2020.