History and Overview of the Federal Estate Tax

The federal estate tax is specified by the Irs as a tax on the right to move property at death. The tax is enforced on the taxable estate, which is the total fair market price of the property transferred at death (called the gross estate) minus allowable reductions. Deductions allowed under the Internal Revenue Code consist of administration costs, funeral costs, charitable transfers and property that will be handed down to an enduring partner.

History of the Estate Tax
Prior to 1916, death taxes were enacted temporarily to raise funds for a specific function. The first version of the estate tax was enacted by Congress in 1797 to fund the formation of the American Navy. The Revenue Act of 1862 enacted an estate tax and presented a gift tax for the very first time in order to fund the Civil War effort. The War Income Act of 1898 implemented an estate tax of.74%. to 15%, which was utilized to money the Spanish-American War.

The Profits Act of 1916 assessed taxes on estates based upon their value since the date of death. An exemption of $50,000 was enabled. Rates ranged from 1% for estates with a net worth below $50,000 to 10% for estates over $5,000,000. These rates were increased in 1917 to 2% for estates valued at less than $50,000 and 25% for estates over $10,000,000. The Earnings Act of 1918 cut the rates on estates valued below $1,000,000 and broadened the estate tax base by consisting of life insurance coverage profits and the value of the making it through partner’s interest in the estate above $40,000 of the estate’s value.
The Revenue Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and added a gift tax. The present tax was rescinded in 1926 and the estate tax rate was lowered to 1% for estates below $50,000 and set at 20% for estates over $10,000,000. In between 1932 and 1942, estate and gift taxes were increased numerous times and exemption quantities were reduced. Estate tax rates were at their highest rate in 1941– 77% for estates over $50,000,000.

The Tax Reform Act of 1976 brought sweeping modifications to the estate and present tax laws. The reform consisted of a generation-skipping tax. The three different taxes entered into a unified system for the very first time. Estate and present taxes were capped at 70% for estates over $5,000,000.
The Economic Healing Act of 1981 phased in an increase in the unified tax transfer credit from $47,000 to $192,000 and a reduction in the maximum tax rate from 70% to 50%. The limitations on estate and present tax marital reductions were removed. The Taxpayer Defense Act of 1997 phased in an increase in the quantity omitted from taxes from $600,000 in 1997 to $1,000,000 in 2006.

Current Law
The present estate taxes are nearing completion of the phased changes stated in the Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Act”). The 2001 Act slowly decreased the maximum estate tax rates from 50% in 2002, to the current rate of 45%, where it will stay through 2009. The quantities exempt from estate taxes increased from $1,000,000 in 2002 to $2,000,000 for 2008. This quantity increases to $3,500,000 for 2009. The 2001 Act repeals the federal estate tax in 2010. Unless Congress acts to extend the tax relief used by the 2001 Act, the rates will return to pre-2001 Act levels in 2011.

The history of federal estate taxes indicates that the U.S. federal government has actually used estate taxes as a source of revenue during hard economic times and war. With the war in Iraq draining resources and the present economic recession, it appears possible that Congress will not extend the estate tax relief offered in the 2001 Act.

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