History and Summary of the Federal Estate Tax

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The federal estate tax is defined by the Internal Income Service 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 moved at death (called the gross estate) minus permitted deductions. Deductions permitted under the Internal Earnings Code consist of administration expenditures, funeral service costs, charitable transfers and property that will be passed on to a surviving partner.

History of the Estate Tax
Prior to 1916, death taxes were enacted briefly to raise funds for a specific purpose. For example, the very first variation of the estate tax was enacted by Congress in 1797 to money the development of the American Navy. The Income Act of 1862 enacted an estate tax and introduced a present tax for the very first time in order to fund the Civil War effort. The War Revenue Act of 1898 executed an estate tax of.74%. to 15%, which was utilized to money the Spanish-American War.

The Profits Act of 1916 evaluated taxes on estates based on their worth since the date of death. An exemption of $50,000 was allowed. Rates varied 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 Revenue Act of 1918 cut the rates on estates valued below $1,000,000 and broadened the estate tax base by including life insurance earnings and the worth 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 present tax. The present tax was repealed in 1926 and the estate tax rate was reduced to 1% for estates below $50,000 and set at 20% for estates over $10,000,000. Between 1932 and 1942, estate and present taxes were increased a number of times and exemption amounts 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 changes to the estate and gift tax laws. The reform included a generation-skipping tax. The three separate 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 Recovery 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 eliminated. The Taxpayer Security Act of 1997 phased in a boost in the quantity omitted from taxes from $600,000 in 1997 to $1,000,000 in 2006.

Current Law
The current estate taxes are nearing completion of the phased changes stated in the Economic Development and Tax Relief Reconciliation Act of 2001 (“2001 Act”). The 2001 Act gradually minimized the optimal estate tax rates from 50% in 2002, to the present rate of 45%, where it will stay through 2009. The amounts 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 reverses the federal estate tax in 2010. Unless Congress acts to extend the tax relief provided by the 2001 Act, the rates will return to pre-2001 Act levels in 2011.

The history of federal estate taxes suggests that the U.S. government has utilized estate taxes as a source of profits during tough financial times and war. With the war in Iraq draining resources and the current financial recession, it appears possible that Congress will not extend the estate tax relief offered in the 2001 Act.


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