Federal estate tax
Federal estate tax is payable on taxable estate of a deceased who is either a U.S. citizen, or is resident in United States. Unlike inheritance tax, which is payable by the beneficiaries of estate, estate tax is payable by the executor, or administrator of the decedent, or any other person who is in possession of the decedent\'s property.
There is a specific method of calculating taxable estate for arriving at federal estate tax. First, the gross estate of the decedent is computed, by adding back values of some properties that may not have been owned by the deceased at the time of death, like value of any annuities or properties and/or interests of surviving spouse. This bloated version of actual estate held by the deceased is then trimmed down with deductions that are specified in Internal Revenue Code\'s Subtitle B, Chapter 11, Subchapter A, Part IV. These deductions include properties left to surviving spouse, charities, etc.
From this trimmed figure of the gross estate, applicable exclusions specified under The Economic Growth and Tax Relief Reconciliation Act of 2001, are deducted to arrive at taxable estate.
These exclusions are:- $2,000,000 for decedents dying in 2006, 2007 and 2008
$3,500,000 for decedents dying in 2009
$ NIL for decedents dying in 2010
The said act phases out federal estate and gift taxes by 2010. However, these taxes resurface in 2011 due to a post-act law. Therefore, exclusion amount of $1,000,000 is available for deduction from estates of those dying in 2011, unless congress decides otherwise. Tentative federal estate tax is then calculated by multiplying the tax rates for the year with the taxable income.
In addition to the above exclusions, a unified credit is also available for setting off estate taxes and gift taxes.
For arriving at the unified credit, tentative tax base is calculated by adding "adjusted taxable gifts" to the taxable estate determined as above. Relevant slab for this base is then identified under the Unified Transfer Tax Rate Schedule of 1997. This tax is then reduced by gift tax on adjusted taxable gifts. The object is to prevent the dying person from avoiding estate tax by gifting away the properties. However, there are methods of reducing the estate tax liability through estate planning.
Example: Consider the estate of a person who died in 2006.
Start with trimmed down gross estate of $4,000,000 calculated in the above mentioned method. Deduct $2,000,000 therefrom as it is the applicable exclusion for 2006. That leaves $2,000,000 as taxable estate. Tax rate applicable for 2006 is 46 percent. So tentative tax and in this case, federal estate tax, is $920,000.
If, however, there were some adjusted taxable gifts, then, the same would be added to taxable estate. Consequent to the addition, tentative tax would be higher. From this higher amount of tax, the unified tax specified under Unified Transfer Tax Rate Schedule, 1997 would be deducted, along with gift tax, to arrive at the federal estate tax.
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