30 Aug Federal Estate Tax Reform: Will it impact your family?
Talks of tax reform are always ongoing in government. Currently, the federal estate tax, otherwise known as the death tax, has been placed on the chopping block. So, what will it mean for you and your family’s estate plan if the death tax is axed? Read on to discover how the federal estate tax is calculated and how likely it would be to impact your family if repealed.
What is the federal estate tax?
The federal estate tax is a tax on a person’s right to transfer property after death. This tax comes into play after a person dies and before his or her heirs inherit the assets left behind. Assets are everything the deceased owned or had an interest in at the time of their death, such as cash, real estate, insurance, business interests, trusts, and annuities. In order to calculate an individual’s federal estate tax, the fair market value of each asset is added together. The total value of the deceased’s assets is called the Gross Estate. Deductions are then made to the deceased’s Gross Estate total for things like mortgages, debts, estate administration costs, or property passed along to a spouse or charity. Lifetime taxable gifts are then added to the Gross Estate number. Finally, the IRS computes the tax and reduces it by the available unified credit.
What will the federal estate tax cost your heirs in inheritance?
In all likely-hood, the federal estate tax will not cost your heirs a penny of their potential inheritance. This is because the tax is applied based on the value of an individual’s assets. Individuals whose estate’s gross value assets and taxable gifts add up to less than $5,490,000 are not required to fill out an estate tax return so long as their estate is not overly complex. This means that unless your estate’s assets add up to more than $5,490,000 or involve jointly-held property or special deductions, your estate plan will not be effected by the potential repeal of the federal estate tax. Additionally, federal estate tax exemption increases with inflation, so the amount set for exemption typically increases from year to year.
Who will repealing the federal estate tax effect?
Since not all estates are required to pay the federal death tax toll, questions are raised as to who its repeal will effect. The obvious answer is only the wealthiest Americans and a few small businesses. It’s estimated that only 0.1 to 0.2 percent of estates are required to pay the federal estate tax. However, even though the percentage of estates paying the tax is small, the revenue generated isn’t. In fact, the Joint Committee of Taxation estimates repealing the tax would cost $269 billion over a decade. This, in turn, would cause more national debt, which would effect all U.S. citizens. However, before worrying too much about the effect repealing the estate tax could have, it’s important to remember that tax reforms are often talked about and rarely seen through. Despite being on the chopping block, the federal estate tax will probably stick around awhile longer.
More information about the federal estate tax can be found here on the IRS’ website.