2015 Federal Estate Tax

Federal property Tax

IRS pronounces 2015 property And reward Tax Limits

the interior income provider announced the 2015 property and gift tax limits today, and the federal property tax exemption rises to $ 5.43 million per person, and the annual reward exclusion amount stays at $ 14,000. These numbers, adjusted once a year for …
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Credits against tax

There are several credits against the tentative tax, the most important of which is a “unified credit” which can be thought of as providing for an “exemption equivalent” or exempted value with respect to the sum of the taxable estate and the taxable gifts during lifetime.

For a person dying during 2006, 2007, or 2008, the “applicable exclusion amount” is $2,000,000, so if the sum of the taxable estate plus the “adjusted taxable gifts” made during lifetime equals $2,000,000 or less, there is no federal estate tax to pay. According to the Economic Growth and Tax Relief Reconciliation Act of 2001, the applicable exclusion increased to $3,500,000 in 2009, the estate tax was repealed for estates of decedents dying in 2010, but then the Act was to have “sunset” in 2011 and the estate tax was to reappear with an applicable exclusion amount of only $1,000,000.

On December 16, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed into law by President Barack Obama on December 17, 2010. The 2010 Act changed, among other things, the rate structure for estates of decedents dying after December 31, 2009, subject to certain exceptions. It also served to reunify the estate tax credit (aka exemption equivalent) with the federal gift tax credit (aka exemption equivalent). The gift tax exemption is equal to $5,250,000.[2] for estates of decedents dying in 2013, and $5,340,000 for estates of decedents dying in 2014.[24]

The 2010 Act also provided portability to the credit, allowing a surviving spouse to use that portion of the pre-deceased spouse’s credit that was not previously used (e.g. a husband died, used $3 million of his credit, and filed an estate tax return. At his wife’s subsequent death, she can use her $5 million credit plus the remaining $2 million of her husband’s).

If the estate includes property that was inherited from someone else within the preceding 10 years, and there was estate tax paid on that property, there may also be a credit for property previously taxed.

Before 2005, there was also a credit for non-federal estate taxes, but that credit was phased out by the Economic Growth and Tax Relief Reconciliation Act of 2001.

Portability

The The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 authorizes the personal representative of estates of decedents dying on or after January 1, 2011, to elect to transfer any unused estate tax exclusion amount to the surviving spouse, in a concept known as portability. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount. If the personal representative of the decedent’s estate elects transfer, or portability, of the DSUE amount, the surviving spouse may apply the DSUE amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death. The portability exemption is claimed by filing Form 706, specifically Part 6 of the estate tax return. Whether the personal representative has an obligation to make the portability election is presently unclear.

Requirements for filing return and paying tax

For estates larger than the current federally exempted amount, any estate tax due is paid by the executor, other person responsible for administering the estate, or the person in possession of the decedent’s property. That person is also responsible for filing a Form 706 return with the Internal Revenue Service (IRS). In addition, the form must be filed if the decedent’s spouse wishes to claim any of the decedent’s remaining estate/gift tax exemption.

The return must contain detailed information as to the valuations of the estate assets and the exemptions claimed, to ensure that the correct amount of tax is paid. The deadline for filing the Form 706 is 9 months from the date of the decedent’s death. The payment may be extended, but not to exceed 12 months, but the return must be filed by the 9 month deadline.

Exemptions and tax rates

Year Exclusion
Amount
Max/Top
tax rate
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 Repealed
2011 $5 million 35%
2012 $5.12 million 35%
2013 $5.25 million[25] 40%
2014 $5.34 million[26] 40%

As noted above, a certain amount of each estate is exempted from taxation by the law. Below is a table of the amount of exemption by year an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption.

For example, assume an estate of $3.5 million in 2006. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $2 million for that year, so the taxable value is therefore $1.5 million. Since it is 2006, the tax rate on that $1.5 million is 46%, so the total taxes paid would be $690,000. Each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion of their inheritance for a total of $1,405,000. This means the estate would have paid a taxable rate of 19.7%.

As shown, the 2001 tax act would have repealed the estate tax for one year (2010) and would then have readjusted it in 2011 to the year 2002 exemption level with a 2001 top rate. That is, had no further legislation been passed, the estate of a person who deceased in the year 2010 would have been entirely exempt from tax while that of a person who deceased in the year 2011 or later would have been taxed as heavily as in 2001. However, on December 17, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Section 301 of the 2010 Act reinstated the federal estate tax. The new law set the exemption for U.S. citizens and residents at $5 million per person,[27] and it provided a top tax rate of 35 percent for the years 2011 and 2012.[28]

On January 1, 2013, the American Taxpayer Relief Act of 2012 was passed which permanently establishes an exemption of $5 million (as 2011 basis with inflation adjustment) per person for U.S. citizens and residents, with a maximum tax rate of 40% for the year 2013 and beyond.[29]

The permanence of this regulation is not ensured: the fiscal year 2014 budget called for lowering the estate tax exclusion, the generation-skipping transfer tax and the gift-tax exemption back to levels of 2009 as of the year 2018.[30]

Non-residents

The $5 million exemption specified in the Acts of 2010 and 2012 (cited above) apply only to U.S. citizens or residents, not to non-resident aliens. Non-resident aliens have only a $60,000 exclusion; this amount may be higher if a gift and estate tax treaty applies.

For estate tax purposes, the test is different in determining who is a non-resident alien (NRA), compared to the one for income tax purposes (the inquiry centers around the decedent’s domicile). This is a subjective test that looks primarily at intent. The test considers factors such as the length of stay in the United States; frequency of travel, size, and cost of home in the United States; location of family; participation in community activities; participation in U.S. business and ownership of assets in the United States; and voting. A foreigner can be a U.S. resident for income tax purposes, but not be domiciled for estate tax purposes.[31]

An NRA is subject to a different estate tax regime than a U.S. taxpayer. The estate tax is imposed only on the part of the gross NRA’s estate that at the time of death is situated in the United States. These rules may be ameliorated by an estate tax treaty. The U.S. does not maintain as many estate tax treaties as income tax treaties, but there are estate tax treaties in place with many of the major European countries, Australia, and Japan.[31]

U.S. real estate owned by the NRA through a foreign corporation is not included in an NRA’s estate. The corporation must have a business purpose and activity, lest it be deemed a sham designed to avoid U.S. estate taxes.

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