Back in 2001, Congress passed tax cuts that included a gradual phase-out of the estate tax, which at the time had an exemption of $1 million and imposed a 55% levy on any amount over that.
Back in 2001, Congress passed tax cuts that included a gradual phase-out of the estate tax, which at the time had an exemption of $1 million and imposed a 55% levy on any amount over that. This year, after a series of adjustments, the estate tax exemption has grown to $3.5 million, and Uncle Sam gets $.45 of every dollar in the estate over that amount. Next year, the tax is scheduled to disappear entirely. After that, barring Congressional action, the tax will revert to pre-2001 levels.
Many lawmakers are already signaling that they would like to repeal the 2010 furlough from the death tax. The question is what the tax structure will look like when it reappears, either next year or in 2011. During his campaign, President Obama proposed freezing the estate tax at the 2009 levels, but whether that will become reality isn’t certain. With the government awash in red ink as a result of multi-billion dollar bailouts and economic stimulus payments, a lower exemption amount and a higher tax rate could pump more much-needed revenue into the federal coffers.
In the face of this uncertainty, most tax advisors counsel that you continue plans to minimize or to eliminate the potential tax bite on your estate. One way to do that is to reduce the size of your estate by giving money away. This year, you can give up $13,000 to any one recipient without incurring gift taxes or using up any of your $1 million lifetime gift tax exemption. If you’re married, your spouse can also give up to $13,000 per person. In addition, you can give an unlimited amount to cover a beneficiary’s college tuition expenses or uninsured medical costs as long as the money goes directly to the college or to the healthcare provider.