Back in 2010 the estate tax was repealed for one year due to provisions contained within the Bush era tax cuts. During that calendar year there was a great deal of debate about the future of the estate tax.
If no changes were made to existing laws, when the tax cuts expired at the end of 2010 the estate tax would have returned in 2011. There would have been a $1 million estate tax credit or exclusion and a 55% maximum rate.
After negotiations on Capitol Hill a new tax relief measure was enacted. This piece of legislation is called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 .
The terms of this act set the estate tax exclusion at $5 million for 2011. This figure was to be adjusted annually to account for inflation.
As a result, the estate tax exclusion was raised to $5.12 million for 2012. After another inflation adjustment, the estate tax exclusion has been $5.25 million throughout 2013.
Because the year is going to end in the relatively near future the Internal Revenue Service has announced the amount of the estate tax exclusion for 2014. It is going up by $90,000 to $5.34 million.
What does this mean to you? The exclusion or credit is the amount that you can transfer to your heirs before the estate tax is applied. Since we are talking about all transfers, we should mention the fact that there is a gift tax in the United States.
The exclusion applies to gifts that you give while you are living coupled with the value of your estate.
If your assets do not exceed $5.34 million in value in 2014, the federal estate tax will not be a factor when you are planning your estate. If your assets do in fact exceed this figure your estate would potentially be exposed to the federal estate tax. It carries a maximum rate of 40 percent.
The good news is that you don’t have to resign yourself to a 40 percent levy on anything that you are passing along that exceeds $5.34 million. With the assistance of a licensed estate planning attorney you can implement tax efficiency strategies to mitigate your exposure.
A Few Words About Spouses
The $5.34 million exclusion that will be in place next year is allotted to each taxpayer. A married couple would have a total of $10.68 million.
This amount will still be available to the surviving spouse because the estate tax is portable between married individuals.
Lastly, we would like to point out the fact that there is an unlimited marital deduction. There is no limit to the amount of property that you can transfer to your spouse free of federal transfer taxes.
That is assuming your spouse is a citizen of the United States. If you are married to a citizen of another country the marital deduction would not be available.