Over the last couple of weeks we have been sharing information that has been made available about adjustments to relevant government program parameters. We have looked at the Social Security cost-of-living adjustment and the increases in the out-of-pocket Medicare costs.
In this post, we will look at yet another relevant figure that has been released by the Internal Revenue Service.
Federal Estate Tax Exclusion
The estate tax exclusion is the amount that can be transferred before the estate tax would be levied on the remainder. Before we provide the updated exclusion for 2021, we should deliver a brief history lesson to put it in the proper context.
In 2001, the exclusion was $675,000, and the maximum rate was an attention-getting 55 percent. When the Bush administration replaced the previous one, tax cuts were a priority, and they extended to the federal estate tax.
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was enacted during the summer of 2001. It established a one million-dollar exclusion in 2002 with a 50 percent top rate.
Two years later, the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) came along to deepen the tax cuts. The exclusion gradually ascended and the rate started dropping by one percent each year.
By 2009, the exclusion had reached $3.5 million, and the maximum rate was 45 percent. The provision that set all of this in motion culminated with the complete elimination of the federal estate tax for the 2010 calendar year.
Once again, a new administration brought a different mindset. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) was enacted in December of 2010. It established a $5 million exclusion and a 35 percent maximum rate.
The American Taxpayer Relief Act of 2012 kept the $5 million exclusion adjusted for inflation, but it increased the rate to 45 percent. These parameters remained in place throughout the Obama years, but the exclusion was adjusted for inflation each year.
It stood at $5.49 million in 2017, and at the end of that year the Tax Cuts and Jobs Act was enacted. A provision contained within this measure doubled the estate tax exclusion, and there have been adjustments to account for the cost of living since then.
In 2020, the exclusion has been $11.58 million, and it will go up to $11.7 million next year.
Rules for Married Couples
While we are on the subject of the estate tax, we should fill in some important details. There is an unlimited marital deduction, so married couples can transfer unlimited assets to one another tax-free.
Prior to the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, a surviving spouse could not use the exclusion that was allotted to their deceased spouse. In tax parlance, this is referred to as the question of “portability.”
The aforementioned measure made the estate tax exclusion portable, so the survivor could use their deceased spouse’s exclusion. This feature has remained in place since then after all of these subsequent tax acts have been enacted.
Federal Gift Tax
There has been a federal gift tax since 1932, and it was unified with the estate tax in the 1970s. The $11.7 million exclusion that we will have next year is a unified exclusion that applies to lifetime gifts and the estate that will be transferred after your passing.
However, you have a bit of a cushion before you have to start using your unified exclusion to give a tax free gift. There is an additional $15,000 per year, per person gift tax exclusion. You can give this much to any number of gift recipients in a calendar year free of taxation.
Vermont State Estate Tax
Here in Vermont, we have a state-level estate tax, and the state estate tax exclusion is also going to rise in 2021. It has been for $4.25 million this year, and it is going up to an even $5 million in 2021.
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