The recent crisis that we had in Washington revolving around the raising of the debt ceiling brought a lot of things out into the open. Just about everyone agreed that there should be cuts in spending. The disagreements revolved around what should be cut, how much should be cut, and whether or not there should be increases in federal revenue mandated.
The way that revenue is increased is by raising taxes. For now, that isn’t going to happen. But there is still sentiment out there for raising taxes on those who are considered to be wealthy in an effort to the reduce the federal debt.
Congress passed a measure that was signed into law by the president in December that is now being called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This act extended the Bush era tax cuts, and it reduced the rate of the estate tax to 35% and upped the estate tax exclusion to $5 million. The tax was repealed for 2010, but in 2009 the top rate was 45% and the exclusion was $3.5 million.
This tax act is going to expire at the end of 2012. As the laws stand currently, on New Year’s Day in 2013 the maximum rate of the estate tax is going to rise to 55% and the estate tax exclusion is going to go down to just $1 million. So right now, if your estate is worth $5 million or less you’re safe from the tax. But at the end of next year, over half of the assets that you would be passing along to your loved ones that exceed $1 million will go to the IRS.
It would take the passage of some new legislation to change these existing parameters. Given the state of affairs in Washington and the fact that 2012 is an election-year, simply assuming that another extension of the Bush tax cuts is in the offing may be an overly optimistic viewpoint. If your estate is worth more than $1 million, it is certainly an issue that is relevant to you.