TAX NEWS - 2010

What is the Federal Estate Tax?

The Federal Estate Tax is a Tax on Transferring Property After Death

On January 1, 2010, the federal estate tax was officially repealed. For persons who died in 2009 or earlier, the federal estate tax was collected on the transfer of a person's assets to his or her loved ones after death. The tax was calculated by adding up the fair market values of all of the decedent's assets on the date of death and then applying estate tax credits and subtracting out allowable estate tax deductions.


Who Was Subject to the Federal Estate Tax?

Prior to January 1, 2010, the estates of every U.S. citizen were subject to the federal estate tax, but not every estate actually had to pay the tax. Why? Because the Internal Revenue Code gave each U.S. citizen a "coupon" that could be applied against their estate tax bill. In 2009 the "coupon" was $3,500,000. Thus, if the value of the net estate - meaning the gross estate reduced by allowable estate tax credits and deductions - did not exceed $3,500,000, then the estate would pass to the heirs free from federal estate taxes.

Although the federal estate tax has been repealed for 2010, it is scheduled to come back in 2011 with only a $1,000,000 exemption. And do not forget about state estate taxes and inheritance taxes. Currently 16 jurisdictions collect an estate tax at the state level and the state "coupons" (exemptions) range from $338,333 in Ohio up to $3,500,000 in Connecticut and Delaware and $3,600,000 in Hawaii.

Seven states currently collect a state inheritance tax, which is completely different from an estate tax since it is assessed against who actually receives the deceased person's property, not on the overall value of the deceased person's property. Note that Maryland and New Jersey are the only two states that collect both state estate taxes and state inheritance taxes.


What Happens if an Estate is Taxable?

What happens if the gross estate exceeds the federal estate tax exemption (or estate tax "coupon") for the year of the decedent's death? Then the estate will have to file a federal estate tax return, called Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, within nine months of the decedent's date of death. And when is the estate tax payment due? At the same time the Form 706 is due - nine months after the date of death, although extensions can be applied for but the payment itself cannot be delayed without accruing interest.