Calculating Estate Tax Liability: 2001 to 2011 and Beyond

Publication Date: November 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

This report provides a basic explanation of how to calculate the federal estate tax liability for a taxable estate of any given size, using the schedule of marginal tax rates and the applicable exclusion amount or the applicable credit amount for the year of death. The applicable exclusion amount is the amount of any decedent's taxable estate that is free from tax, known informally as the estate tax exemption. The applicable credit amount is the corresponding tax credit equal to the tax that would be due on a taxable estate the size of the applicable exclusion amount.

A shortcut is available to calculate the tax on the estates of decedents dying in 2006 through 2009. The estate tax liability can be calculated simply by multiplying the amount of the taxable estate in excess of the applicable exclusion amount for the year of death times the maximum estate tax rate for the year. The applicable exclusion amount is $2 million for 2006-2008 and $3.5 million for 2009. The maximum tax rate is 46% for 2006 and 45% for 2007-2009.

A more formal method is required to calculate the tax liability for years before 2006 or for 2011 and beyond. This is because more than one marginal tax rate applies to taxable estate values in excess of the exclusion amount. First, the tentative tax that would be due on the entire taxable estate is calculated from the marginal tax rate table for the year of death. Then, the applicable credit amount for the year of death is subtracted from the tentative tax to determine the tax due.

A numerical example is presented in the text and in worksheets for a $5 million taxable estate of a decedent dying in 2007 or 2008. Both the shortcut and formal methods are used to calculate the tax liability.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16, EGTRRA) gradually lowered the maximum estate tax rate and substantially raised the applicable exclusion amount over the years 2002 through 2009. The maximum tax rate fell from 60% under prior law in 2001 (a 55% marginal rate on taxable estate values over $3 million plus a 5% surtax from $10 million to $17 million) to 45% in 2007-2009. The applicable exclusion amount rose from $675,000 in 2001, in steps, up to $3.5 million in 2009. EGTRRA repealed the estate tax for decedents dying in 2010. However, all of the provisions under the act are scheduled to sunset on December 31, 2010. Unless changed beforehand, in 2011 the law will revert back to what it would have been had EGTRRA never been enacted. Under a provision of the Taxpayer Relief Act of 1997 (P.L. 105-34), in 2011 and beyond the applicable exclusion amount would be $1 million, in contrast to $675,000 in 2001. The tables in the appendix present the marginal estate tax rates and the applicable exclusion amount for each year. This report will be updated when there are changes in the law governing estate taxes.