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Page 10 of 21 |
Key estate and gift tax changes were made in 2001. What were those changes? |
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The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes in the tax laws, and significantly revised the federal estate and gift taxes (e.g., repeal of the estate tax, decrease in the tax rates, increase in the exclusion amount). Though the tax technically is fully repealed in 2010, the 2001 law brings back the estate and gift tax into existence in its current 2001 form in 2011, unless Congress takes further action.
Highlights of the 2001 changes include:
(1) The federal estate tax exemption amount ($1.5 million in 2004 and 2005) is raised to $2 million in 2006 and increased slowly to $3.5 million in 2009. The estate tax is fully repealed in 2010, but reinstated in 2011.
(2) The top federal estate tax rate (55%) drops in steps to 45% through 2007-2009.
(3) Once the estate tax is phased out, assets will not receive an automatic step-up in income tax basis at death. However, each estate will receive a $1.3 million in basis step-up on transfers to any beneficiaries. There is also an additional $3 million basis increase for assets transferred to a surviving spouse.
(4) The deduction for interests in a qualified family-owned business is repealed after 2003.
(5) The generation skipping transfer tax (GST) is abolished for all transfers after December 31, 2009, but is scheduled to return in 2011 and thereafter. The GST tax exemption matches the applicable estate tax exclusion amount in effect for that calendar year.The tax rate (55% in 2001) drops to 50% in 2002 and gradually declines to 45% in 2007--2009.
Though the estate and GST taxes are repealed in 2010, the gift tax remains. The lifetime exclusion from the gift tax, previously tied to the estate tax exemption, caps at $1,000,000 in 2002 and will not increase thereafter to match the estate tax exemption levels.The top gift tax gradually declines from 55% in 2001 to 35% by 2010.
Beginning in 2002--2004, the state death tax credit is reduced 25% each year and repealed in 2005. However, starting in 2005, estates may deduct state taxes from their federal returns.
The 5% surtax that applied to estates over $10 million is repealed in 2002. |
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