The death tax is back, but it’s not as high as it could have been
The 2010 tax year isn’t behind us yet. For those who opted for an extension, the deadline is this Monday, October 17. But this should not prevent us from looking ahead to the next tax year. After all, returns can be filed as early as January and many people are already wondering what 2011 tax changes are in store.
The short answer is that there are very few 2011 tax changes at all. Thanks to the dramatic, last-minute December compromise in Congress, the Bush tax cuts were extended through 2012. That means that tax rates will stay pretty much the same (the brackets have only been adjusted slightly to adjust for inflation).
Another major change resulting from the Congressional deal is to to reunify the federal estate tax with the gift tax. For the next two years, the gift tax will share the same exemption and rate levels as the estate tax. As in 2010, the annual exclusion rate is still $13,000, which means you can give an unlimited number of gifts at $13,000 or less as long as they are to different individuals.
Before you lament the return of the death tax, please remember that in 2010, when there was no federal estate tax in force, some heirs actually ended up paying more thanks to high capital gains taxes when they sold their inherited property.
This is because before 2010, an heir could “step up” the basis of inherited property to receive its fair market value on the day of the former owner’s death. In 2010, however, the basis was carried over and heirs had to assume it, causing higher capital gains taxes in many cases.
But you don’t really need to worry about any of this since with the new estate tax rules for 2011 we revert back to the original system of a full step-up in basis.
For information on this and other aspects of the federal estate tax, please refer to the IRS website.
The 2011 estate or death tax rules are one area where important changes do come into play.
You may remember that thanks to the original Bush tax cuts passed in 2001, there was no death tax in 2010. With the expiration of these tax cuts, the federal estate tax was set to return with a vengeance in 2011. The top rate would have been set 55% with the exemption threshold at $1 million.
The Congressional compromise of December 2010 has brought important changes to this original 2011 estate tax picture. While the death tax has not been included among the tax cuts now extended through 2012 it has been substantially reconfigured.
The new federal estate tax exemption level is now set at $5 million with a tax rate of 35%. This means that if your estate is worth less than $5 million, it is not subject to the tax. But if it is valued above $5 million, it will be taxed at 35%. For married couples, the estate tax exemption level is $10 million.
The new 2011 estate tax rules are applicable only for 2011 and 2012. In 2013, the estate tax will revert back to the initially prescribed 2011 levels (with the 55% rate and the $1 million exemption), unless of course there’s another round of legislation.
