Now that we are operating under the terms of the American Taxpayer Relief Act of 2012 there is some clarity regarding the estate tax parameters.
Back in 2011 a $5 million exclusion was put into place with the provision for an inflation adjustment in 2012. The adjusted figure wound up being $5.12 million. This exclusion remained constant after the passage of the aforementioned piece of legislation.
Another adjustment for inflation was applied for 2013, bringing the exclusion up to $5.25 million. Though it is called a tax relief act it raised the maximum rate of the federal estate tax from 35% to 40%.
At the end of 2010 and at the end of 2012 two different so-called tax relief acts were expiring. If they would have expired without yet another piece of legislation passing to change things the estate tax exclusion would’ve gone down to $1 million and the rate would’ve risen to 55% in both instances.
This most recently passed tax act does not have such an expiration date built in. For this reason people have been saying the parameters that were put into place, a $5 million base exclusion with inflation adjustments coupled with a 40% top rate, are “permanent.”
Permanent is a very strong word, and it should probably be taken with a grain of salt with regard to these parameters because there are powerful forces that would like to see different ones. Some people would like to see the estate tax repealed altogether, while others would like to see the tax increased.
One individual who would fit into the latter category is the president. He has proposed a 2014 budget that includes an increase in the estate tax rate and a reduction in the exclusion that would be implemented in 2018.
He is proposing a return to the framework that was in place in 2009: a 45% top rate, a $3.5 million estate tax exclusion, and a $1 million gift tax exclusion.