There are many people who do not think that the federal estate tax is necessary or fair. They make a number of points. One of them is the fact that the estate tax is imposed on assets that remain in your estate after you have paid taxes on your income throughout your life. While you are living, there is no reason to impose a hefty tax on these assets by virtue of their existence. However, for some reason these assets are taxed after you die if they exceed a certain amount. This is why many people refer to the estate tax as the “death tax.”
This double taxation is only part of the argument. There are those who would question why some people have to pay the estate tax while the majority of American families are exempt. If there is some logical rationale behind taxing asset transfers after someone dies, shouldn’t everyone be forced to pay the tax?
The dividing line that separates those who must pay the tax from those who are not exposed is the federal estate tax exclusion. Before we pass along the current amount of the exclusion, let’s backtrack a bit so that you can understand the back story.
At the end of 2010, the Bush era tax cuts were scheduled to expire. If this would have taken place without any new legislation passing, the estate tax exclusion would have reverted to $1 million, and the maximum rate would have been 55%. However, in the 11th hour a tax relief act was passed. As a result, the estate tax parameters were more favorable.
In 2011, there was a $5 million exclusion and a 35% maximum rate. The tax relief act allowed for an inflation adjustment, and after this adjustment was applied the 2012 exclusion was $5.12 million.
This tax relief act that was passed at the end of 2010 had an expiration date. It expired at the end of 2012. The same scenario existed. If there were no legislative changes passed, the estate tax exclusion would’ve been $1 million and the top rate would have been 55% in 2013.
This scenario was part of the debacle that would have presented itself if the country would have fallen over the “fiscal cliff” as it was being called.
As it turned out, legislators came to an agreement, and the terms of it are contained within the American Taxpayer Relief Act of 2012. Provisions contained within this act allow for the same exclusion with ongoing adjustments for inflation. The exclusion in 2013 was $5.25 million. The latest adjustment placed the exclusion at $5.34 million for 2014.
As a result, the first $5.34 million that you pass on to your heirs can be transferred free of the estate tax. Anything that you leave behind that exceeds this amount is going to be subject to the estate tax and its 40% maximum rate unless you work with an estate planning attorney to employ tax efficiency strategies.