The federal estate tax can significantly erode your legacy because it carries a 40 percent rate. Fortunately, there is a pretty hefty exclusion that can be used to transfer a certain amount before the tax would kick in.
We will provide the details in this post on everything you need to know about estate taxes, and we will start with a chronology of the changes that have been made to the exclusion over recent years.
Tax Reform Acts
The estate tax parameters can be changed via legislative mandate, and tax reform acts tend to come down the pike under new presidential administrations. In 2009, the exclusion was $3.5 million, and the top rate was 45 percent.
There is a provision within the Bush tax cuts that completely repealed the estate tax for the entire 2010 calendar year. The provision was scheduled to sunset at the end of that year, and if no additional legislation was passed, the exclusion would have been reduced to $1 million.
This never came to pass because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) was signed into law by then-President Obama. It established a $5 million federal estate tax exclusion with a 35 percent maximum rate.
There was an inflation adjustment the following year that brought the exclusion up to $5.12 million, and at the end of that year, the American Taxpayer Relief Act of 2012 was signed into law. Under its terms, the exclusion remained the same, and the rate of the tax was increased to 40 percent.
These parameters stayed constant until the Tax Cuts and Jobs Act was enacted in 2017 under the new administration. A provision contained within this act dramatically increased the exclusion. It was set at $11.18 million for 2018, and there have been inflation adjustments since then.
This figure has increased since then via inflation indexing, and in 2023, it sits at $12.92 million
Rules for Married Couples
There are a couple of important details that apply to the impact of the estate tax on married couples.
The exclusion was made portable when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted. Portability in this context defines the ability of the surviving spouse to use the exclusion that was earmarked for their deceased spouse.
This feature has remained intact ever since then, so a surviving spouse would have two exclusions to utilize.
Even more importantly, there is an unlimited marital estate tax deduction. You can leave any amount of money to your spouse tax-free, as long as your spouse is a citizen of the United States.
Federal Gift Tax
The obvious reaction to the estate tax would be lifetime gift-giving, but this is not the solution, because there is a gift tax that is unified with the estate tax. Your available exclusion would be reduced by the value of taxable gifts that you give during your life.
However, there is an additional gift tax exemption that you can use to give as much as $17,000 to any number of people in a given year free of federal transfer taxes. Since each person is allotted this exemption, if you are married, you and your spouse could give up to $34,000 to an unlimited number of gift recipients annually tax-free.
In addition to the $17,000 per year, per person exclusion, there is an educational gift tax exemption. If you want to pay school tuition for students, you will not be taxed for your generosity.
There is a similar exclusion that allows you to pay medical bills for others in a tax-free manner, and this extends to the payment of health insurance premiums.
New York State Estate Tax
There is a state-level estate tax in New York as well. The exclusion is $6.58 million this year, but there is the so-called exclusion “cliff” that is very relevant. If the value of an estate exceeds 105% of the exclusion amount, the entire estate is subject to taxation.
View Our On-Demand Webinar
If you still have questions on what you need to know about estate taxes, we can help you. We have an on-demand webinar that you can view at your convenience that will answer all of your questions about the estate planning process. This is a free opportunity, and you can click the following link to gain access: Manhattan, NY estate planning webinar.