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History and Introduction of the Federal Estate Tax

The federal estate tax is defined by the Internal Revenue Service as a tax on the right to move property at death. The tax is troubled the taxable estate, which is the overall fair market worth of the property moved at death (called the gross estate) minus allowable reductions. Reductions enabled under the Internal Profits Code include administration expenses, funeral expenses, charitable transfers and property that will be handed down to a surviving spouse.

History of the Estate Tax
Prior to 1916, death taxes were enacted temporarily to raise funds for a particular function. The first version of the estate tax was enacted by Congress in 1797 to fund the development of the American Navy. The Earnings Act of 1862 enacted an inheritance tax and introduced a present tax for the very first time in order to money the Civil War effort. The War Earnings Act of 1898 implemented an estate tax of.74%. to 15%, which was used to fund the Spanish-American War.

The Income Act of 1916 examined taxes on estates based upon their value since the date of death. An exemption of $50,000 was allowed. Rates ranged from 1% for estates with a net value listed 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 broadened the estate tax base by consisting of life insurance coverage proceeds and the value of the surviving partner’s interest in the estate above $40,000 of the estate’s value.
The Revenue Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and included a gift tax. The present tax was rescinded in 1926 and the estate tax rate was lowered to 1% for estates listed below $50,000 and set at 20% for estates over $10,000,000. In between 1932 and 1942, estate and gift taxes were increased numerous times and exemption amounts were lowered. Estate tax rates were at their greatest rate in 1941– 77% for estates over $50,000,000.

The Tax Reform Act of 1976 brought sweeping modifications to the estate and present tax laws. The reform included a generation-skipping tax. The 3 separate taxes entered into a unified system for the very first time. Estate and present taxes were topped at 70% for estates over $5,000,000.
The Economic Recovery Act of 1981 phased in an increase in the unified tax transfer credit from $47,000 to $192,000 and a decline in the optimal tax rate from 70% to 50%. The limits on estate and gift tax marital reductions were gotten rid of. The Taxpayer Defense Act of 1997 phased in an increase in the quantity omitted from taxes from $600,000 in 1997 to $1,000,000 in 2006.

Current Law
The existing estate taxes are nearing completion of the phased changes stated in the Economic Development and Tax Relief Reconciliation Act of 2001 (“2001 Act”). The 2001 Act gradually reduced the optimal estate tax rates from 50% in 2002, to the present rate of 45%, where it will remain through 2009. The quantities 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 return to pre-2001 Act levels in 2011.

The history of federal estate taxes suggests that the U.S. federal government has utilized estate taxes as a source of revenue during difficult financial times and war. With the war in Iraq draining resources and the current financial recession, it appears possible that Congress will not extend the estate tax relief provided in the 2001 Act.