The Essential Estate Tax Facts

Politicians keep talking about repealing the estate tax forever. In the meantime, it still exists. Here is a summary of essential estate tax facts.

A federal tax is imposed on the value of estates that exceed a statutory exclusion. That threshold of untaxed value is $2 million for individuals dying in 2007 through 2008; and $3.5 million in 2009. Under current law, the estate tax will expire on December 31, 2009, only to be reinstated on January 1, 2011.

Heirs may choose to determine the value of an estate on the date of death or exactly six months later. Surviving spouses never have to pay federal estate tax on amounts they inherit, no matter how large.

The tax rate starts at 18% and increases to 45% in 2007 (46% in 2006) for taxable estates worth more than $2 million. However, any amount that might be taxed in the low brackets is covered by the $2 million exclusion. As a practical matter then, the estate tax begins (and ends) at 45% on amounts over $2 million.

Real property used by family-run farms and businesses that is passed on to younger generations may be entitled to a special exclusion of value to reduce the estate tax burden on it. To qualify, the heirs must have been actively involved in running the business. If an estate tax is due, the heirs who run these enterprises can have up to 14 years to pay.

To keep an estate within the exclusion limit, an individual can give as much as $12,000 a year, tax-free, to an unlimited number of people, from close relatives to strangers. A couple can give $24,000 jointly. Under a 1997 law that ties the tax-free gift limit to inflation, the limit may continue to increase in $1,000 increments when inflation justifies an increase. In addition to annual exclusions, each taxpayer may exclude gifts of up to $1 million from gift tax. A properly completed gift will also be excluded from the estate tax.

If you have any questions about the infamous disappearing and reappearing Estate Tax, please call.