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History and Introduction of the Federal Estate Tax

The federal estate tax is specified by the Irs as a tax on the right to move property at death. The tax is troubled the taxable estate, which is the overall fair market price of the property moved at death (called the gross estate) minus permitted deductions. Reductions enabled under the Internal Income Code consist of administration expenditures, funeral expenditures, charitable transfers and property that will be handed down to a making it through partner.

History of the Estate Tax
Prior to 1916, death taxes were enacted temporarily to raise funds for a particular function. The first variation of the estate tax was enacted by Congress in 1797 to money the formation of the American Navy. The Income Act of 1862 enacted an estate tax and presented a present tax for the very first time in order to fund the Civil War effort. The War Revenue Act of 1898 carried out an estate tax of.74%. to 15%, which was utilized to fund the Spanish-American War.

The Profits Act of 1916 assessed taxes on estates based upon their worth since the date of death. An exemption of $50,000 was permitted. Rates ranged from 1% for estates with a net worth below $50,000 to 10% for estates over $5,000,000. These rates were increased in 1917 to 2% for estates valued at less than $50,000 and 25% for estates over $10,000,000. The Income Act of 1918 cut the rates on estates valued below $1,000,000 and expanded the estate tax base by including life insurance profits and the worth of the making it through spouse’s interest in the estate above $40,000 of the estate’s value.
The Income Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and included a gift tax. The gift tax was repealed in 1926 and the estate tax rate was decreased to 1% for estates below $50,000 and set at 20% for estates over $10,000,000. In between 1932 and 1942, estate and gift taxes were increased a number of times and exemption amounts were reduced. Estate tax rates were at their highest rate in 1941– 77% for estates over $50,000,000.

The Tax Reform Act of 1976 brought sweeping modifications to the estate and gift tax laws. The reform consisted of a generation-skipping tax. The 3 separate taxes became part of a unified system for the first time. Estate and present taxes were capped at 70% for estates over $5,000,000.
The Economic Recovery Act of 1981 phased in a boost in the unified tax transfer credit from $47,000 to $192,000 and a reduction in the maximum tax rate from 70% to 50%. The limitations on estate and gift tax marital reductions were removed. The Taxpayer Defense Act of 1997 phased in a boost in the amount excluded from taxes from $600,000 in 1997 to $1,000,000 in 2006.

Current Law
The existing estate taxes are nearing the end of the phased modifications stated in the Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Act”). The 2001 Act gradually minimized the optimal estate tax rates from 50% in 2002, to the present rate of 45%, where it will stay through 2009. The amounts exempt from estate taxes increased from $1,000,000 in 2002 to $2,000,000 for 2008. This amount increases to $3,500,000 for 2009. The 2001 Act repeals the federal estate tax in 2010. Unless Congress acts to extend the tax relief provided by the 2001 Act, the rates will go back to pre-2001 Act levels in 2011.

The history of federal estate taxes shows that the U.S. government has utilized estate taxes as a source of income during hard financial times and war. With the war in Iraq draining resources and the present economic recession, it seems possible that Congress will not extend the estate tax relief provided in the 2001 Act.

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