The estate tax in the United States is a tax on the transfer of the estate of a deceased person. The tax applies to property that is transferred via a will or according to state laws of intestacy. Other transfers that are subject to the tax can include those made through an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, applies to transfers of property during a person's life.
In addition to the federal estate tax, many states have enacted similar taxes. These taxes may be termed an "inheritance tax" to the extent the tax is payable by a person who inherits money or property of a person who has died, as opposed to an estate tax, which is a levy on the estate (money and property) of a person who has died. The tax is often the subject of political debate, and opponents of the estate tax call it the "death tax". Some supporters of the tax have called it the "Paris Hilton tax".
If an asset is left to a spouse or a federally recognized charity, the tax usually does not apply. In addition, a maximum amount, varying year by year, can be given by an individual, before and/or upon their death, without incurring federal gift or estate taxes: $5,340,000 for estates of persons dying in 2014 and 2015, $5,450,000 (effectively $10.90 million per married couple, assuming the deceased spouse did not leave assets to the surviving spouse) for estates of persons dying in 2016. Because of these exemptions, it is estimated that only the largest 0.2% of estates in the U.S. will pay the tax. For 2017, the exemption increased to $5.49 million. In 2018, the exemption doubled to $11.18 million per taxpayer due to the Tax Cuts and Jobs Act of 2017. As a result, only about 2,000 estates per year in the US are currently liable for federal estate tax.
In response to the concern that the estate tax interferes with a middle-class family's ability to pass on wealth, proponents point out that the estate tax currently affects only estates o
In response to the concern that the estate tax interferes with a middle-class family's ability to pass on wealth, proponents point out that the estate tax currently affects only estates of considerable size (over $5 million, and $10 million for couples) and provides numerous credits (including the unified credit) that allow a significant portion of even large estates to escape taxation. Proponents note that abolishing the estate tax will result in tens of billions of dollars being lost annually from the federal budget. Proponents of the estate tax argue that it serves to prevent the perpetuation of wealth, free of tax, in wealthy families and that it is necessary to a system of progressive taxation.
A driving force behind support for the estate tax is the concept of equal opportunity as a basis for the social contract. This viewpoint highlights the association between wealth and power in society – material, proprietary, personal, political, social. Arguments that justify wealth disparities based on individual talents, efforts, or achievements, do not support the same disparities where they result from the dead hand. These views are bolstered by the concept that those who enjoy a privileged position in society should have a greater obligation to pay for its costs. The strength of political opposition to the estate tax, proponents argue, would not be found under a veil of ignorance, in which policy makers were kept from knowing the wealth of their own families.[unreliable source?]
Winston Churchill argued that estate taxes are "a certain corrective against the development of a race of idle rich". This issue has been referred to as the "Carnegie effect," for Andrew Carnegie. Carnegie once commented, "The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would'." Some research suggests that the more wealth that older people inherit, the more likely they are to leave the labor market. A 2004 report by the Congressional Budget Office found that eliminating the estate tax would reduce charitable giving by 6–12 percent. Chye-Ching Huang and Nathaniel Frentz of the Center on Budget and Policy Priorities assert that repealing the estate tax "would not substantially affect private saving...." and that repeal would increase government deficits, thereby reducing the amount of capital available for investment. In the 2006 documentary, The One Percent, Robert Reich commented, "If we continue to reduce the estate tax on the schedule we now have, it means that we are going to have the children of the wealthiest people in this country owning more and more of the assets of this country, and their children as well.... It's unfair; it's unjust; it's absurd."
Proponents of the estate tax tend to object to characterizations that it operates as a "double tax." They point out many of the earnings subject to estate tax were never taxed because they were "unrealized" gains. Others describe this point as a red herring given common overlapping of taxes. Chye-Ching Huang and Nathaniel Frentz of the Center on Budget and Policy Priorities assert that large estates "consist to a significant degree of 'unrealized' capital gains that have never been taxed...."
Supporters of the estate tax argue there is longstanding historical precedent for limiting inheritance, and note current generational transfers of wealth are greater than they have been historically. In ancient times, funeral rites for lords and chieftains involved significant wealth expenditure on sacrifices to religious deities, feasting, and ceremonies. The well-to-do were literally buried or burned along with most of their wealth. These traditions may have been imposed by religious edict but they served a real purpose, which was to prevent accumulation of great disparities of wealth, which, estate tax proponents suggest, tended to prevent social destabilization, revolution, or disruption of functioning economic systems.
Economist Jared Bernstein has said: "People call it the 'Paris Hilton tax' for a reason, we live in an economy now where 40 percent of the nation's wealth accumulates to the top 1 percent. And when these folks leave bequests to their heirs, we're talking about bequests in the tens of millions".
Free market supporters of the tax, including Adam Smith and the founding fathers would argue that people should be able to get to the top of the market through earning wealth, based on meritocratic competition, not through unearned, inherited handouts, which were central to the aristocratic systems they were opposed to, and fought the War of Independence to free American citizens from. Smith wrote:
A power to dispose of estates for ever is manifestly absurd. The earth and the fulness of it belongs to every generation, and the preceding one can have no right to bind it up from posterity. Such extension of property is quite unnatural.
Unearned transfers of wealth work against the free market by creating a disincentive of hard work in
Unearned transfers of wealth work against the free market by creating a disincentive of hard work in the recipients, and others in the market. If the income from estate tax is reduced, this would have to be made up broadly through taxes on working people. Accordingly, if estate tax was increased relative to other taxes, Irwin Stelzer argues it could pay for "lowering the marginal tax rate faced by all earners. Reduce taxes on the pay for that extra work, and you will get more of it; reduce taxes on the profits from risk-taking, and entrepreneurs will take more chances and create more jobs. Reduce the taxes on recipients of inheritances, on the other hand, and they will work less and be less likely to start up new businesses..".
Unhindered inheritance has another possible influence on some in the market; if many of the wealthiest in the country acquired their wealth through inheritance, while contributing nothing to the market personally to get there, people at the lower end of the market may have equal economic potential as many of those receiving some of this 40 percent of wealth, but did not have the luck of being born to wealthy parents. The disparity in fair chance of acquiring initial wealth, on top of pre-existing differences in non fiscal sustenance like differing qualities of education, inherited work ethic, and valuable connections, causes resentment and the perception that hard work is of diminished importance, when some, due to bad luck will struggle to afford the basics of living even at maximum effort, while others may never need to work, and even present this lifestyle as ideal.. The disparity in initial gifted wealth also means a reduced ability for some to accumulate wealth; it is a lot easier to put money aside if you inherited a house and do not have to rent one. These factors create a system perceived to be rigged against those who are not lucky enough to be born into wealthy families, along with political instability; continuous infighting and even civil wars. Reducing estate tax exacerbates this situation, while increasing estate tax promotes a fairer free market, especially if this excess wealth is used to encourage productivity, while also encouraging wealthy parents to focus on providing the best skills and education for their children. Michael J. Graetz has said: "Indeed, that's what the case for the estate tax boils down to: basic fairness. The tax affects a small number of people who inherit large amounts of wealth—and who can afford to give up a portion of their windfall to help finance their government."
Some proponents of a steep estate tax argue that concentrating wealth in the hands of a few is harmful to both the economy and to democracy itself. Oscar Mayer heir Chuck Collins writes "Billionaires are expanding their shares of the pie at the expense of investments in our social safety net, infrastructure, and education systems," and notes that "Supreme Court Justice Louis Brandeis observed, 'You can have concentrated wealth in the hands of a few or democracy. But you can’t have both.'"
Some people oppose the estate tax on principle of individualism and a market economy. In their view, proponents of the tax often argue that "excess wealth" should be taxed without defining "excess" or explaining why taxing it is undesirable if it was acquired by legal means. Such arguments are seen to have a predilection for collectivist principles that opponents of the estate tax oppose. In arguing against the estate tax, the Investor's Business Daily has editorialized that "People should not be punished because they work hard, become successful and want to pass on the fruits of their labor, or even their ancestors' labor, to their children. As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day.".
A similar argument is based on a distrust of governments to use taxes for the public good. In an article in Washington Examiner, Michael Shindler argued that "inheritance of multigenerational wealth allows people, especially young people, to comfortably pursue callings th
A similar argument is based on a distrust of governments to use taxes for the public good. In an article in Washington Examiner, Michael Shindler argued that "inheritance of multigenerational wealth allows people, especially young people, to comfortably pursue callings that, despite their vital importance to human flourishing, are typically uncompensated by the market" and cites Lord Byron, Thomas Jefferson, and Ludwig Wittgenstein as examples of such individuals. Similarly, Shindler also argues that "whereas in Europe museums, theaters, symphony halls, and other cultural institutions are typically government-subsidized, here they gain the bulk of their funding from the generosity of philanthropic foundations founded and sustained by the stewards of multigenerational wealth....Consequently, American culture is less an expression of the whims of bureaucrats and more a manifestation of the will of its citizenry."
Other arguments against an estate tax are based on its economic effects. The Tax Foundation published research suggesting that the estate tax is a strong disincentive to entrepreneurship. Its 1994 study found that a 55% tax rate had roughly the same effect as doubling an entrepreneur's top effective marginal income tax rate. Also, the estate tax was found to impose a large compliance burden on the U.S. economy. Past studies by the same group estimated compliance costs to be roughly equal to the revenue raised – nearly five times more cost per dollar of revenue than the federal income tax – making it one of the nation's most inefficient revenue sources.
Another argument is that tax obligation can overshadow more fundamental decisions about the assets. In certain cases, it is claimed to create an undue burden. For example, pending estate taxes could be a disincentive to invest in a viable business or an incentive to liquidate, downsize, divest from or retire one. This is especially true when an estate's value is about to surpass the exemption amount. Older people may see less value in maintaining a farm or small business than reducing risk and preserving their capital, by shifting resources, liquidating assets, and using tax avoidance techniques such as insurance, gift transfer, trusts and tax-free investments.
Another argument is that the estate tax burdens farmers because agriculture requires more capital assets, such as land and equipment, to generate the same income that other types of businesses generate with fewer assets. Individuals, partnerships and family corporations own 98% of the nation's 2.2 million farms and ranches. The estate tax may force surviving family members to sell land, buildings, or equipment to continue their operation. The National Farmers Union advocated relief for farmers by increasing the exemption per estate to $5 million. Americans Standing for the Simplification of the Estate Tax advocates relief for farmers and small business owners by eliminating death as a taxable event in what the group describes as a down payment on their estate taxes during their earning years. Along these lines, the American Solution for Simplifying the Estate Tax Act, or 'ASSET Act', of 2014 (H.R. 5872) was introduced on December 11, 2014 to the 113th Congress by Rep. Andy Harris.
Another set of arguments against the estate tax is based on its enforcement. The Tax Foundation notes that because the tax can be avoided with careful estate planning, estate taxes are just "penalties imposed on those who neglect to plan ahead or who retain unskilled estate planners". A disparity between tax rates may encourage wealthy people to minimize taxation by moving their wealth outside the United States. As a result, the collected tax will be far less than claimed by proponents and will lower the tax base, opponents argue. However, most countries have inheritance tax at similar or higher rates.
The caption for section 303 of the Internal Revenue Code of 1954, enacted on August 16, 1954, refers to estate taxes, inheritance taxes, legacy taxes and succession taxes imposed because of the death of an individual as "death taxes". That wording remains in the caption of the Internal Revenue Code of 1986, as amended.
On July 1, 1862, the U.S. Congress enacted a "duty or tax" with respect to certain "legacies or distributive shares arising from personal property" passing, either by will or intestacy, from deceased persons. The modern U.S. estate tax was enacted on September 8, 1916 under section 201 of the On July 1, 1862, the U.S. Congress enacted a "duty or tax" with respect to certain "legacies or distributive shares arising from personal property" passing, either by will or intestacy, from deceased persons. The modern U.S. estate tax was enacted on September 8, 1916 under section 201 of the Revenue Act of 1916. Section 201 used the term "estate tax". According to Professor Michael Graetz of Columbia Law School and professor emeritus at Yale Law School, opponents of the estate tax began calling it the "death tax" in the 1940s. The term "death tax" more directly refers back to the original use of "death duties" to address the fact that death itself triggers the tax or the transfer of assets on which the tax is assessed.
While the use of terms like "death duty" had been known earlier, specifically calling estate tax the "death tax" was a move that entered mainstream public discourse in the 1990s, as an attempt to give it a devastating new nickname in a manner similar to a neologism. This happened after a proposal was shelved that would have reduced the threshold from $600,000 to $200,000, after it proved to be more unpopular than expected, and awakened political interest in reducing the tax. For some reason, surveys suggest that opposition to inheritance and estate taxes is even stronger with the poor than with the rich.
Many opponents of the estate tax refer to it as the "death tax" in their public discourse partly because a death must occur before any tax on the deceased's assets can be realized and also because the tax rate is determined by the value of the deceased's persons assets rather than the amount each inheritor receives. Neither the number of inheritors nor the size of each inheritor's portion factors into the calculations for rate of the estate tax.
Proponents of the tax say the term "death tax" is imprecise, and that the term has been used since the nineteenth century to refer to all the death duties applied to transfers at death: estate, inheritance, succession and otherwise.
Chye-Ching Huang and Nathaniel Frentz of the Center on Budget and Policy Priorities assert that the claim that the estate tax is best characterized as a "death tax" is a myth, and that only the richest 0.14% of estates owe the tax.
Political use of "death tax" as a synonym for "estate tax" was encouraged by Jack Faris of the National Federation of Independent Business during the Speakership of Newt Gingrich.
Well-known Republican pollster Frank Luntz wrote that the term "death tax" "kindled voter resentment in a way that 'inheritance tax' and 'estate tax' do not".
In 2016, presidential candidate Donald Trump released a health care plan which used the term "death penalty" in the context of health savings accounts which would pass tax-free to the heirs of an estate.
In July 2006, the IRS confirmed that it planned to cut the jobs of 157 of the agency's 345 estate tax lawyers, plus 17 support personnel, by October 1, 2006. Kevin Brown, an IRS deputy commissioner, said that he had ordered the staff cuts because far fewer people were obliged to pay estate taxes than in the past.
There are two levels of exemption from the gift tax. First, transfers of up to (as of 2020) $15,000 per (recipient) person per year are not subject to the tax. Individuals can make gifts up to this amount to each of as many people as they wish each year. In a marriage, a couple can pool their individual gift exemptions to make gifts
There are two levels of exemption from the gift tax. First, transfers of up to (as of 2020) $15,000 per (recipient) person per year are not subject to the tax. Individuals can make gifts up to this amount to each of as many people as they wish each year. In a marriage, a couple can pool their individual gift exemptions to make gifts worth up to $30,000 per (recipient) person per year without incurring any gift tax. Second, there is a lifetime credit on total gifts until a combined total of $5,250,000 (not covered by annual exclusions) has been given.
In many instances, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate, the effectiveness of which depends on the lifespan of the donor and the number of donees. (This also gives the donees immediate use of the assets, while the donor is alive to see them enjoy it.)
Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $5 million (tied to inflation in the same manner as the estate tax exemption) may be subject to a generation-skipping transfer tax if certain other criteria are met.