Today, the steep 2017 exemption threshold of $5.49 million ($10.98 million for married couples who take advantage of estate tax “portability”) effectively exempts many wealthy estates from taxation as well. The basic exemption, throughout history, existed to exclude low- and middle-income households from the estate tax, ensuring that only those estates valued at higher than the exemption level are subject to tax. As part of the “fiscal cliff” deal enacted in 2013, that higher exemption level was made permanent. Bush’s 2001 tax cut package authorized the gradual repeal of the federal estate tax by 2010, President Barack Obama and Congress agreed in 2011 to reinstate the tax with a basic exemption of $5 million-the highest level ever-indexed to inflation. The small number of Americans liable for the tax is largely the result of a long-running trend toward weakening it at the federal level. resulting in federal estate tax liability was only 0.2 percent-just two out of every one thousand deaths-for deaths occurring in 2014 and owing tax in 2015 (estate taxes are usually filed the year after a person dies). In fact, the percentage of deaths in the U.S. The federal estate tax was designed to apply only to the wealthiest Americans-and that is exactly what it does. This function is now more important than ever: in 2012, the wealthiest 1 percent of Americans owned 42 percent of the wealth nationwide-more than the poorest 90 percent combined. While these taxes typically represent only a small portion of overall state tax collections, estate taxes (which are paid by taxable estates upon death) and inheritance taxes (which are paid by individuals who receive gifts from estates) play an important role in reducing the transfer of concentrated wealth from one generation to the next. A century ago, the federal government enacted an estate tax to “break up the swollen fortunes of the rich,” and every state followed suit, enacting a similar tax of its own. Until 2001, levying a tax on the transfer of wealth from one generation to the next was one of the few things all fifty states could agree on. This policy brief explains state inheritance and estate taxes, discusses recent state trends and policy decisions that have impacted the taxes, and explores how states can adopt or strengthen these important components of a progressive tax structure. But this need not be so states can restore or improve their estate and inheritance taxes as a vital progressive revenue source to support services and communities while also protecting the source from the whims of federal lawmakers. Unfortunately, the trend of late among states has tended toward weakening or completely eliminating them. While many of the taxes levied by state and local governments fall most heavily on low-income families, only the very wealthy pay estate and inheritance taxes.Ĭhanges in the federal estate tax in recent years, however, caused states to reevaluate the structure of their estate and inheritance taxes. For much of the last century, estate and inheritance taxes have played an important role in fostering strong communities by promoting equality of opportunity and helping states adequately fund public services.
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