History and Introduction of the Federal Estate Tax
The federal estate tax is defined by the Irs as a tax on the right to move property at death. The tax is imposed on the taxable estate, which is the total fair market price of the property moved at death (called the gross estate) minus allowable deductions. Deductions permitted under the Internal Revenue Code consist of administration expenses, funeral expenditures, charitable transfers and property that will be handed down to an enduring partner.
History of the Estate Tax
Prior to 1916, death taxes were enacted temporarily to raise funds for a particular purpose. For instance, the very first variation of the estate tax was enacted by Congress in 1797 to fund the formation of the American Navy. The Earnings Act of 1862 enacted an inheritance tax and presented a gift tax for the first time in order to fund the Civil War effort. The War Profits Act of 1898 implemented an inheritance tax of.74%. to 15%, which was used to money the Spanish-American War.
The Earnings Act of 1916 assessed taxes on estates based upon their worth since the date of death. An exemption of $50,000 was allowed. Rates ranged from 1% for estates with a net value listed 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 Earnings Act of 1918 cut the rates on estates valued below $1,000,000 and broadened the estate tax base by consisting of life insurance coverage profits and the worth of the making it through partner’s interest in the estate above $40,000 of the estate’s value.
The Income Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and included a present tax. The gift tax was rescinded in 1926 and the estate tax rate was decreased to 1% for estates below $50,000 and set at 20% for estates over $10,000,000.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 several times and exemption amounts were decreased. 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 modifications to the estate and gift tax laws. The reform consisted of a generation-skipping tax. The 3 different taxes ended up being part of 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 decline in the maximum tax rate from 70% to 50%. The limitations on estate and present tax marital deductions were eliminated. The Taxpayer Protection Act of 1997 phased in an increase in the quantity omitted from taxes from $600,000 in 1997 to $1,000,000 in 2006.
The existing 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 decreased the optimal estate tax rates from 50% in 2002, to the existing rate of 45%, where it will stay through 2009. The quantities 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 rescinds the federal estate tax in 2010. Unless Congress acts to extend the tax relief provided by the 2001 Act, the rates will go back to pre-2001 Act levels in 2011.
The history of federal estate taxes shows that the U.S. government has actually utilized estate taxes as a source of income throughout difficult financial times and war. With the war in Iraq draining pipes resources and the current financial recession, it seems possible that Congress will not extend the estate tax relief provided in the 2001 Act.