The number of estate tax returns that were filed in 2001 is 17 times more than in 2021, according to the Tax Policy Center. That number has decreased so rapidly because the federal government continues to over more generous estate tax exemptions. The exemption allows estates under a certain value to pass property to heirs tax-free. The estate tax law has changed five times since 2001, raising the exemption significantly from its original $675,000 threshold.
How the Exemption Works
Estates valued at or above the exemption amount are required to pay the tax. Even then, only the value over the exemption threshold is taxable. The 2022 exemption is $12.06 million, up from $11.7 million in 2021. The first $12.06 million of your estate is therefore exempt from taxation. Your estate wouldn’t be subject to the federal estate tax when it is filed in 2023 if it’s worth $12.059 million and you were to die in 2022. The exemption is indexed for inflation, so it tends to increase most years, even when tax legislation doesn’t affect it. In the 2023 tax year, that threshold will increase to 12.92 million. Most of the value of an estate over the threshold is taxed at 40%.
The Exemption Is Portable
The government also allows your estate to transfer any unused portion of your exemption to your spouse if you’re married. This provision is referred to as “portability.” For example, you would have $6.06 million of your exemption “left over” in 2022 if your estate were worth $6 million because the exemption threshold is $12.06 million. You could effectively give this portion of the exemption to your spouse, increasing their exemption by that amount when they die. Presumably, your spouse will inherit most, if not all, of your $6 million in property, so this allows them to pass that property to heirs tax-free at the time of their own death. The estate is also entitled to an exemption in the year your spouse dies, and your unused exemption is added to that amount.
History of Federal Estate Tax Laws
The landmark Taxpayer Relief Act of 1997 called for a gradual increase in the estate exemption from $600,000 in 1997 to $1 million by 2006. This set the stage for greater increases in years to come. Estate taxes from 2010 through 2012 were based on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act that was signed into law by President Obama on Dec. 17, 2010, but the law was only good for two years. It was supposed to expire on Dec. 31, 2012, so the federal estate tax exemption and rate would have defaulted to the previous number that was in effect. This didn’t happen. Congress passed the American Taxpayer Relief Act (ATRA) on Jan. 1, 2013, and President Obama signed it into law on Jan. 2, 2013. ATRA was intended to make permanent changes to the laws governing federal estate taxes, gift taxes, and generation-skipping transfer taxes. Fast-forward to President Trump, who signed the Tax Cuts and Jobs Act (TCJA) in December 2017. The exemption had been only $5.49 million in 2017. The TCJA more than doubled that to $11.18 in 2018.
Tax Exemptions and Rates Over the Years
Here’s how the estate tax has been assessed down over the years:
The Exemption Can Decrease After 2025
The TCJA is not permanent. It is slated to expire after 2025, and the exemption amount can revert to its pre-2018 level at that time unless Congress acts to renew the legislation or even some of its provisions.
