November 7, 2013

Estate Tax in 2014

When a deal was reached to avert the fiscal cliff back in December 2012 (how time flies), the baseline for the estate tax was made permanent. Whereas before the estate tax was subject to periodic renewal, or repeal as in the case of 2010, the American Taxpayer Relief Act of 2012 ("ATRA") ushered in a permanent baseline estate tax amount.  This baseline amount, $5M in 2010 dollars, would be indexed to inflation for the upcoming years. The chart below shows how the estate tax has increased incrementally since 2010.

Of note, the ATRA is subject to amendment or repeal, but such would require an act of Congress and Presidential approval. Previously the estate tax needed re-authorization periodically because the law lacked the required number of votes to make the baseline amount permanent. This changed when the ATRA received enough votes to make it permanent in the U.S. Senate. This was welcome news to attorneys and clients because the estate tax is no longer, presumably, a moving target that is subject to the whimsical nature of politics.

Since the estate tax was pegged to inflation, the IRS has recently released the inflation adjusted figure for 2014. For decedents who pass away in the year 2014, the applicable exclusion amount will be $5.34M. In plain terms this means that if a decedent passes away in 2014 and their estate is equal to or less than $5.34M, no estate tax will be due. 

The decedent's estate includes basically any asset wherever located. In other words, pretty much everything you own, regardless of location, is valued for estate tax purposes. However, few estates are actually affected by the federal estate tax given that the applicable exclusion amount is quite large. Still, this post is only dedicated to the federal estate tax and each state is free to impose their own estate tax. For example, you may be reading this article and be domiciled in New York state (hat tip: Google Analytics), which does impose an estate tax. For reference, California does not impose an estate tax.

Year                   Amount Excluded         Maximum Tax Rate

2001                   $675,000                      55%

2002                   $1M                             50%

2003                   $1M                             49%

2004                   $1M                             48%

2005                   $1M                             47%

2006                   $2M                             46%

2007                   $2M                             45%

2008                   $2M                             45%

2009                   $3.5M                          45%

2010                   Repealed                      0%

2011                   $5M                             35%

2012                   $5.12M                        35%

2013                   $5.25M                        40%

2014                   $5.34M                        40%

Also of note is the fact that the annual exclusion amount for gift taxes will continue to be $14,000 for 2014 per the same IRS memorandum. This is the same figure that is used for 2013. 

In plain English, this $14,000 figure represents the maximum amount a person can gift to another person in the 2014 calendar year without having to deal with gift tax liability. This total does not include payment of tuition, payment of medical expenses, charitable donations and gifts between spouses as those are considered exempt gifts.