April 24, 2009
/24-7PressRelease/ -- The Fate of the Federal Estate Tax
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The Economic Growth and Tax Relief Reconciliation Act
In 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). This law included several federal tax reforms, including:
1. Increasing the amount of standardized deductions for married couples
2. Increasing the amount of the child credit and the number of families who qualify for it
3. Lowering tax rates
4. Increasing the annual amount of contributions to IRAs and 401ks
4. Increasing the amount of contributions to education savings accounts
6. Making the tax credit for adoption permanent
The EGTRRA also changed the laws concerning federal estate taxes. Under the Bush tax cuts, both the estate tax rate and exemption amount were lowered in annual incremental amounts with the estate tax being completed eliminated by 2010.
Prior to the 2001 law, estates valued at $675,000 or less were not subject to -- or were exempt from -- the federal estate tax. Any amount over $675,000 was taxed at a maximum rate of 55%. For example, if an estate in 2001 was valued at $1,000,000, the first $675,000 of the estate would not be subject to the estate tax. However, the amount over the exemption amount, or $325,000, would be taxed.
Under the EGTRRA, the amount of the estate sheltered from estate taxes was raised initially from $675,000 to $1 million and the maximum rate of estate taxes was reduced from 55% to a flat rate of 50%. The amount of the exemption increased and the rate of taxes decreased each year between 2002 until 2010. The scheduled changes are listed below by year:
Year | Exemption Amount | Tax Rate
2002 | $1 million | 50 percent
2003 | $1 million | 49 percent
2004 | $1.5 million | 48 percent
2005 | $1.5 million | 47 percent
2006 | $2 million | 46 percent
2007 | $2 million | 45 percent
2008 | $2 million | 45 percent
2009 | $3.5 million | 45 percent
2010 | Estate Tax Eliminated | -------
The Sunset Provision
In order for the federal estate tax to remain abolished after 2010, Congress must act to make the change permanent. Otherwise, the exemption amount and estate tax rate will return to pre-2002 levels in 2011: the first $1 million of the estate will be exempt from federal estate taxes and any amount over $1 million will be taxed at 55%.
Given the current estate of the economy, it is perhaps unlikely that the estate tax will be allowed to die. In January 2009, the Wall Street Journal reported that the Democrat-controlled Congress and President Obama have different plans for the estate tax. Both Congress and President Obama plan to take action to reverse some of President's Bush's tax cuts, including preventing the estate tax from disappearing in 2010. During his campaign, President Obama said he was in favor of making the 2009 estate tax exemption and rate levels permanent ($3.5 million exemption; 45% tax rate). However, Congress is in favor of returning the tax to pre-2002 levels.
Why Does the Estate Tax Matter?
Many people, particularly in these tough economic times, have little interest in federal estate taxes. But the belief that estate taxes only affect the rich is not true. It does not take a very wealthy person to reach the $1 million dollar exemption. For example, small business owners and family farms likely will have to pay estate taxes in order to pass on their legacies to their loved ones -- legacies that may have taken an entire generation to build. And these are families who already are suffering in the struggling economy to maintain their livelihoods.
Estate taxes are a tax on death. They punish those who worked hard and want to pass on their property to not only their families, but also to charities and other worthy organizations. Estate taxes discourage people from saving and starting small businesses. While there will be a federal estate tax, when people already are stretched financially and their investments have lost great value, does it make sense for the federal government to further penalize them with a tax at their death?
The Need for Intelligent Estate Planning
With the future of federal estate taxes still unknown, some may believe they do not need the services of an estate planning attorney. This, however, is exactly what an estate planning lawyer helps people with: planning for the unknown.
Even families who have lost money in the stock market through their 401ks and other investments as a result of the economic downturn still need an estate plan. Eventually the market will recover, and if Congress and President Obama lower the exemption rate to $1 million, more families will face the possibility of federal estate taxes. An experienced estate planning attorney can help families -- with all levels of assets -- protect their legacies.
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