Joint Committee on Taxation's March 22, 2010 summary of the estate, gift, and GST taxes

On March 22, 2010, the Joint Committee on Taxation published a report titled, “Present Law and Background Data Related to the Federal Tax System in Effect for 2010 and 2011.” JCX-19-10.  The introduction to the report explains that it was drafted in preparation of a March 23, 2010 public hearing by the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means.

The report covers the four main elements of the current federal tax system: (1) income tax on individuals and corporations -- “regular” income tax and an alternative minimum tax; (2) payroll taxes on wages; (3) estate, gift, and generation-skipping transfer taxes; and (4) excise taxes on selected goods and services.

Here is the report’s summary of the the estate, gift, and GST taxes (footnotes omitted):

IV. SUMMARY OF ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAXES

General

Under present law as modified by the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), the estate, gift, and generation-skipping transfer tax laws applicable to gifts made and for estates of decedents dying in 2010 and 2011 are not the same. Certain aspects of pre-2010 transfer tax laws, for example, are modified or repealed solely for purposes of decedents dying and gifts made in 2010, but again will apply to transfers made in years 2011 and thereafter. Therefore, this section provides a brief summary of certain laws that apply to taxable transfers that occur before, during, and after 2010.

Estate tax

For decedents dying before 2010, an estate tax is imposed on the taxable estate of any person who was a citizen or resident of the United States at the time of death and on certain property belonging to a nonresident of the United States that is located in the United States at the time of death. The estate tax is imposed on the estate of the decedent and generally is based on the fair market value of the property passing at death. The taxable estate generally equals the worldwide gross estate less certain allowable deductions, including a marital deduction for certain bequests to the surviving spouse of the decedent and a deduction for certain bequests to charities.

For 2009, a unified credit of $1,455,800 was available with respect to taxable transfers at death. These credits effectively exempt a total of $3.5 million in cumulative taxable transfers from the estate tax. The maximum estate tax rate in effect for decedents dying in 2009 was 45 percent.

The estate transfer taxes are repealed for decedents dying and gifts made in 2010.

The estate, gift, and generation-skipping transfer tax provisions of EGTRRA are scheduled to sunset at the end of 2010. Therefore, the transfer tax laws as scheduled to be in effect prior to the enactment of EGTRRA generally will apply to estates of decedents dying, gifts made, and generation-skipping transfers made after December 31, 2010. This includes reinstatement of the estate tax for decedents dying after 2010. A single graduated rate schedule with a top rate of 55 percent and a single effective exemption amount of $1 million will apply for purposes of determining estate and gift tax on cumulative taxable transfers made by a taxpayer by lifetime gift or by bequest.

Gift tax

The United States generally imposes a gift tax on transfers of property by gift made by a U.S. citizen or resident, whether made directly or indirectly and whether made in trust or otherwise. Nonresident aliens are subject to the gift tax with respect to transfers of tangible real or personal property where the property is located in the United States at the time of the gift. The gift tax is imposed on the donor and is based on the fair market value of the property transferred. Deductions are allowed for certain gifts to spouses and to charities. Annual gifts of $13,000 (for 2010) or less per donor per donee generally are not subject to tax.

A unified credit of $345,800 is available with respect to taxable transfers by gifts; this credit effectively exempts a total of $1 million in cumulative taxable inter vivos gifts from gift tax. The gift tax remains in effect in 2010 with a $1 million effective exemption amount and a 35 percent rate.

The estate, gift, and generation-skipping transfer tax provisions of EGTRRA are scheduled to sunset at the end of 2010. Therefore, the transfer tax laws as scheduled to be in effect prior to the enactment of EGTRRA generally will apply to estates of decedents dying, gifts made, and generation-skipping transfers made after December 31, 2010. A single graduated rate schedule with a top rate of 55 percent and a single effective exemption amount of $1 million will apply for 2011 and thereafter for purposes of determining estate and gift tax on cumulative taxable transfers made by a taxpayer by lifetime gift or by bequest.

Generation-skipping transfer tax

For decedents dying and gifts made before 2010, a separate transfer tax was imposed on generation-skipping transfers, in addition to any estate or gift tax that is normally imposed on such transfers. This tax generally was imposed on transfers, either directly or through a trust or similar arrangement, to a beneficiary in more than one generation below that of the transferor. For 2009, the generation-skipping transfer tax was imposed at a flat rate of 45 percent on generation-skipping transfers in excess of $3.5 million.

The generation-skipping transfer taxes are repealed for decedents dying and gifts made in 2010.

The estate, gift, and generation-skipping transfer tax provisions of EGTRRA are scheduled to sunset at the end of 2010. Therefore, the transfer tax laws as scheduled to be in effect prior to the enactment of EGTRRA generally will apply to estates of decedents dying, gifts made, and generation-skipping transfers made after December 31, 2010. This includes reinstatement of the generation-skipping transfer tax for gifts made after 2010. The generation-skipping transfer tax exemption amount will be $1 million, and the generation-skipping transfer tax rate will be 55 percent for 2011 and thereafter.

Basis considerations

Property received from a donor of a lifetime gift before, during, or after 2010 generally receives a carryover basis, which means that the basis in the hands of the donee generally is the same as the donor's basis.

Assets acquired from a decedent who died before 2010 generally received a "stepped up" basis, which generally resulted in a basis equal to fair market value on the date of the decedent's death (or on an alternate valuation date). For assets acquired from a decedent who dies in 2010, the rules providing for a stepped-up basis are repealed and replaced with the modified carryover basis rules of section 1022 of the Code. Assets acquired from a decedent who dies after 2010 generally will receive a stepped-up basis.

Table 8 informs that from 1950 through 2009, the estate and gift taxes peaked at 2.6% of total revenues.  The pie charts below (which I arranged side-by-side) indicate that the estate and gift taxes will constitute 1% of federal receipts in 2010 and 2011. 

 
Table 14 is a very good resource because it lists 30 tax rules expiring on 12/31/10.  Among those listed is the “[e]state tax deduction for State death taxes paid (secs. 2011, 2053, 2058, 2102, 2106, and 2604).”  A footnote further describes that this deduction was once a credit:

Prior to 2005, an estate was allowed a credit for State death taxes paid. Sections 561-564 of EGTRRA phased down the allowable credit amount from years 2002 through 2004, before repealing the credit and replacing it with a deduction for State death taxes paid for estates of decedents dying after 2004.

Comments

[Andrea Downs]

The pie chart above is a good explanation about how much the taxes constitute. This can be understood easily by the common readers.