Estate Tax Exemption Changes

As you may know, the estate tax exemption is scheduled to revert back to $1 million in 2011 with a top estate tax rate of 55 percent. However, in an effort to avert an increase in income tax rates effective January 1st, the President has agreed to a $5 million estate tax exemption with a 35 percent estate tax rate.

Income Tax Rates

The proposed deal would extend the Bush tax cuts for another two years keeping the current income tax rates in effect for all taxpayers. The capital gains tax rate was scheduled to rise from 15 percent in 2010 to 20 percent in 2011. The proposal would extend the capital gains tax rate and the highest federal income tax rate of 35 percent for another two years.

What This Means

Prior to the proposed compromise on the Bush tax cuts, many commentators thought it was possible there would be a reinstatement of the Bush tax cuts with an exclusion of $3.5 million and a 45 percent estate tax rate on any amount over that.

If the Bush tax cuts are extended, it means that a single individual could bequeath up to $5 million without being subject to federal estate taxes. A married couple could bequeath up to $10 million.

If the proposed deal is not signed into law, the estate tax will revert back to the former law prior to the 2001 Tax Reconciliation Act. This means that the federal estate tax exemption will be $1 million per person.