Fluid Federal Estate, Gift Taxes Can Pose Problems

By Julian Gray; Frank Petrich | Pittsburgh Post-Gazette (Pittsburgh, PA), August 28, 2011 | Go to article overview

Fluid Federal Estate, Gift Taxes Can Pose Problems


Julian Gray; Frank Petrich, Pittsburgh Post-Gazette (Pittsburgh, PA)


Nothing incites (a correct term, we think) more discussion than taxes, as evidenced by the responses to our last column about the Pennsylvania Inheritance Tax. That's only half the story. Let's take a look at what the IRS imposes on U.S. citizens in the form of federal estate and gift taxes.

Unlike the state tax, which is imposed at death, the federal tax can be levied both during one's lifetime (the gift tax) and at death (the estate tax). However, the two federal taxes are "connected" to a certain extent and are considered separately from the state inheritance tax (although there are some federal tax credits available to a decedent for the payment of the state tax.)

The current federal estate and gift taxes are presumably fixed through Dec. 30, 2012. This is due to the extension of a law enacted during President George W. Bush's administration beginning in 2001 and which was set to expire at the end of 2010. As it stands, Congress implemented an extension (and expansion) of the tax changes.

What does this mean in real numbers to us? First, let's review the very basics, keeping in mind that these taxes are also in addition to individual income taxes paid annually during one's lifetime.

The federal estate tax: This tax (which had been paid by fewer than 2 percent of all estates) is levied by the IRS on the value of assets transferred from the taxable estate of a deceased person to another party. There are certain exemptions from this tax, such as transfers to a spouse or to a charitable organization. If not exempt, assets are taxed at a marginal rate, currently topping out at 35 percent. Yes, that's 35 cents on every dollar transferred to children, grandchildren, etc.

However, there is some good news. Currently, an individual's first $5 million is not taxed. At first, this might seem as though the tax is reserved for quite wealthy folks, as many of us would only hope to have such assets to pass on to our heirs. Yet, this significant exclusion is only temporary through the end of 2012. In fact, had Congress not changed the previous law, the exclusion would have "sunset" (reverted) to its previous level of only $1 million on Jan. 1, 2011. As it sits now, the law will cause the lifetime exclusion to revert back to $1 million on Jan. 1, 2013. And, to make matters worse, the top marginal estate tax rate will revert back to 55 percent. (That makes the current top rate of 35 percent look a little better.)

While no one has a crystal ball to determine if Congress will act before the end of next year to address this change, given the current state of our economy (and our Congress) and the need for raising revenue, many experts say the $5 million lifetime exclusion will again be a difficult issue with which to deal especially since Congress will need to take up this issue just about the time when we will be electing a new president and Congress. …

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