President's Proposed Tax Law Changes Would Increase Estate, Gift, and GST Tax Rates in 2018

Download the Department of the Treasury Federal Budget report, General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals (197 pgs; 1.6 MB; PDF opens in new window)

Download Department of the Treasury Report: General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals
(197 pgs; 1.6 MB; PDF opens in new window)

President Obama’s budget proposal for 2015, which was released earlier this month, includes provisions to modify Estate and Gift Tax provisions established in the American Taxpayer Relief Act or ATRA, which was passed by Congress in 2013. The proposal would restore the Estate, Gift, and Generation-Skipping Transfer (GST) tax rates and parameters to levels that were in effect in 2009.

According to the Department of the Treasury report, General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals:

 
  • The current estate, GST, and gift tax rate is 40 percent, and each individual has a lifetime exclusion for all three types of taxes of $5 million (indexed after 2011 for inflation from 2010).
  • Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the maximum tax rate was 55 percent, plus a five-percent surcharge on the amount of the taxable estate between approximately $10 million and $17.2 million (designed to recapture the benefit of the lower rate brackets).
  • The exclusion for estate and gift tax purposes was $675,000 and was scheduled to increase to $1 million by 2006.

Download the Department of the Treasury Federal Budget report: General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals (197 pgs; 1.6 MB; PDF opens in new window)

Current IRS Estate Tax Rules

Under provisions established in the EGTRRA:

  • Beginning in 2002, the top tax rate for all three types of taxes was reduced incrementally until it was 45 percent in 2007.
  • In 2004, the exemption for estate taxes (but not for gift taxes) began to increase incrementally until it was $3.5 million in 2009, and the GST tax exemption and rate became unified with the estate tax exemption and rate. During this post-EGTRRA period through 2009, the gift tax exemption remained $1 million.
  • For 2010, the estate tax was to be replaced with carryover basis treatment of bequests, the GST tax was to be not applicable, and the gift tax was to remain in effect with a $1 million exclusion and a 35% tax rate.
  • The EGTRRA provisions were scheduled to expire at the end of 2010, meaning that the estate tax and GST tax would be inapplicable for only one year.

Additionally, the American Taxpayer Relief Act of 2012 (ATRA) (154 pgs, 437 KB, PDF opens in new window) permanently raised the top tax rate for estate, GST, and gift taxes to 40%. It also made permanent all the substantive estate, GST and gift tax provisions as in effect during 2012.
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Proposed Changes to Estate, GST, and Gift Tax Rules

The stated reason for the proposed changes was that ATRA retained such a substantial portion of the tax cut provided to the most affluent taxpayers under The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) that is too costly to continue. A more equitable and fair estate tax law that raises an appropriate amount of tax revenue is needed.

Proposed changes to the tax regulations include:

  • Beginning in 2018, estate, GST, and gift tax parameters would permanently revert to the levels applied during 2009.
  • The top tax rate would be 45 percent and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.
  • There would be no indexing for inflation.
  • When computing gift and estate tax liabilities, no estate or gift tax would be incurred by reason of decreases in the applicable exclusion amount with respect to a prior gift that was excluded from tax at the time of the transfer.
  • Finally, the unused estate and gift tax exclusion of a decedent electing portability and dying on or after the effective date of the proposal would be available to the decedent’s surviving spouse in full on the surviving spouse’s death, but would be limited during the surviving spouse’s life to the amount of remaining exemption the decedent could have applied to his or her gifts made in the year of his or her death.
  • The proposal would be effective for the estates of decedents dying, and for transfers made, after December 31, 2017.

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But, as a recent Forbes.com article, points out, President Obama’s tough position on rates may turn out to be mute since he will leave office nearly a year before the budget has them taking effect on Jan. 1, 2018.

For a more in-depth and detailed look at the proposed estate, GST, and gift tax changes, read the Forbes article: Obama Budget Takes Aim At Popular Wealth Transfer Tools.
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