Estate tax in the United States

Estate tax in the United States
Name	Estate Tax
Country	United States
Type	Excise tax
Subheader	Federal estate tax
Jurisdiction	Internal Revenue Service
Legislation	Internal Revenue Code, Revenue Act of 1916
First imposed	1916

Estate tax in the United States. The federal estate tax is an excise tax imposed on the transfer of a deceased person's estate, governed primarily by the Internal Revenue Code and administered by the Internal Revenue Service. Its modern form originated with the Revenue Act of 1916, though similar transfer taxes have existed since the 18th century. The tax applies only to estates exceeding a high exemption threshold, making it relevant to a small fraction of American families annually, and remains a perennial subject of intense political and economic debate.

History and legislative background

The concept of a death duty in America dates to the Stamp Act of 1797, but the modern estate tax was permanently established by the Revenue Act of 1916 to help fund preparedness for World War I. Major reforms occurred under the Revenue Act of 1935 during the Great Depression and throughout the mid-20th century. The Economic Growth and Tax Relief Reconciliation Act of 2001 began a process of temporarily phasing out the tax, which was later reversed. Key legislative actions shaping the tax include the Tax Reform Act of 1976, which unified it with the gift tax, and the American Taxpayer Relief Act of 2012, which set permanent parameters. Historical figures like Andrew Mellon and Franklin D. Roosevelt engaged in significant policy debates over its structure and purpose.

Current structure and rates

The federal estate tax is imposed on the taxable estate of a decedent who is a citizen or resident of the United States. The tax features a progressive rate structure, with a top marginal rate of 40% applied to the portion of an estate exceeding the exemption amount. For 2023, the basic exclusion amount is $12.92 million per individual, as set by the Tax Cuts and Jobs Act of 2017, with amounts indexed annually for inflation. The unified credit, often called the applicable credit amount, directly offsets tax liability. Transfers to a surviving spouse, under the unlimited marital deduction, generally defer the tax until the death of the second spouse. The tax is calculated on Form 706, which must be filed for estates exceeding the filing threshold.

Exemptions and deductions

The primary exemption is the basic exclusion amount, which is portable between spouses under provisions enacted by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Beyond the marital deduction, significant deductions include those for transfers to qualified charitable organizations and for any debts of the decedent, such as mortgages or loans. Administrative expenses of the estate, including fees for executors, attorneys, and appraisers, are also deductible. Certain family-owned business interests may qualify for special valuation rules under Section 2032A of the Internal Revenue Code. The annual gift tax exclusion allows for lifetime transfers that do not count against the estate tax exemption.

Payment and compliance

The executor of the estate, typically named in the will, is responsible for filing Form 706 with the Internal Revenue Service within nine months of the date of death, unless an extension is granted. Payment of the tax liability is generally due at the same time. Estates consisting largely of interests in a closely held business may qualify to pay the tax in installments over up to ten years under Section 6166. Compliance involves a detailed inventory and valuation of all assets, including real property, securities, business interests, and personal effects, often requiring appraisals from specialists. The IRS may conduct audits, and disputes over valuation are frequently litigated in the United States Tax Court.

Economic and policy debates

Proponents, including economists like Emmanuel Saez and Gabriel Zucman, argue the tax promotes progressivity, reduces concentrations of wealth, and raises revenue from those with the greatest ability to pay. Opponents, such as the American Family Business Institute, contend it constitutes double taxation, harms family farms and small businesses, and discourages capital formation. Think tanks like the Brookings Institution and the Tax Foundation frequently publish analyses on its economic impact. The tax is often a flashpoint in broader debates about income inequality and has been labeled a "death tax" by critics. Legislative proposals range from repeal, often supported by Republicans, to expansion, supported by Democrats like Bernie Sanders and Elizabeth Warren.

State-level estate and inheritance taxes

Several states impose their own estate or inheritance taxes, independent of the federal system. As of 2023, states with an estate tax include Washington, Oregon, Minnesota, Illinois, New York, Vermont, Maine, Massachusetts, Rhode Island, Connecticut, and the District of Columbia. States like Pennsylvania and New Jersey impose an inheritance tax, which is levied on beneficiaries rather than the estate itself. The exemption thresholds and rate structures at the state level vary widely, with some, like Maryland, imposing both an estate and an inheritance tax. The absence of a state-level tax is often cited as a competitive advantage by states like Florida and Texas.

Category:Taxation in the United States Category:Property taxes