Taxation in the US: Estate tax (Part 2)

Exemptions and tax rates.

 As noted before, a certain amount of each estate is exempted from taxation by the law. Below is a table of the amount of exemption by year an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption.

For example, assume an estate of $3.5 million in 2006. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $2 million for that year, so the taxable value is therefore $1.5 million. Since it is 2006, the tax rate on that $1.5 million is 46%, so the total taxes paid would be $690,000. Each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion of their inheritance for a total of $1,405,000. This means the estate would have paid a taxable rate of 19.7%.

As shown below, the 2001 tax act would have repealed the estate tax for one year (2010) and would then have readjusted it in 2011 to the year 2002 exemption level with a 2001 top rate. That is, had no further legislation been passed, the estate of a person who died in the year 2010 would have been entirely exempt from tax while that of a person who died in the year 2011 or later would have been taxed as heavily as in 2001. However, on December 17, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Section 301 of the 2010 Act reinstated the federal estate tax. The new law set the exemption for U.S. citizens and residents at $5 million per person, and it provided a top tax rate of 35 percent for the years 2011 and 2012.

On January 1, 2013, the American Taxpayer Relief Act of 2012 was passed which permanently establishes an exemption of $5 million (as 2011 basis with inflation adjustment) per person for U.S. citizens and residents, with a maximum tax rate of 40% for the year 2013 and beyond.

The permanence of this regulation is not ensured: the fiscal year 2014 budget called for lowering the estate tax exclusion, the generation-skipping transfer tax and the gift-tax exemption back to levels of 2009 as of the year 2018. The exemption amounts of $11,180,000 in 2018 and $11,400,000 in 2019 are also currently (as of December 2018) scheduled to sunset 12/31/2025 (Tax Cuts and Jobs Act of 2017).

Puerto Rico and other U.S. possessions.

A decedent who is a U.S. citizen born in Puerto Rico and resident at the time of death in a U.S. possession (i.e., PR) is generally treated, for federal tax purposes, as though he or she were a nonresident who is not a citizen of the United States, so the $5 million exemption does not apply to such a person's estate. For U.S. estate tax purposes, a U.S. resident is someone who had a domicile in the United States at the time of death. A person acquires a domicile by living in a place for even a brief period of time, as long as the person had no intention of moving from that place.