The year 2010 was the first time since 1916 that there were no estate taxes. People who died in 2010 and left their heirs a massive property to inherit will not be taxed for even a single dime. Barack Obama signed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 on December 17, 2010. This law covers the taxes levied on the estates of individuals dying between 1st January 2010 and 31st December 2012. The exemption was set at $5 million, but this was subject to variation due to the effect of inflation. As a result of which the exemption has increased slightly in 2012.
Estate Tax Exemption for 2012
One would be liable to pay estate taxes only if the taxable estate is more than $5.12 million, and the rules also have the provision for a 'stepped-up basis'. Stepped-up rules are important in case you want to sell your property later on. Let us take an example to illustrate this. Suppose you inherited a house worth $200,000 from your father. He had paid $70,000 many years ago to buy it. Now, if you sell the property at $250,000, then your taxable gain would be just $250,000 minus $200,000, that is, $50,000. The annual gift tax exemption remains unchanged at $13,000 per individual. To get a clearer understanding on the changes in estate tax over the years, let us take a look at the following table.
|Year||Estate Tax Exemption|
Filing Estate Taxes
It is the responsibility of the executor or the person specified in the decedent's will to pay the estate tax. One needs to fill Form 706 return of the Internal Revenue Service. While filing your returns, ensure that you are mentioning the worth of the property correctly. The time-frame within which you should file the taxes is nine months from the decedent's death, but in some cases it can be extended to 12 months. You should try your level best so that you file the income tax returns within the first nine months.
Estate taxes are closely related to inheritance taxes and as a matter of fact, these are commonly referred to as inheritance taxes. The difference between the two is that an estate tax is levied on the whole fair market value of the property, whereas inheritance tax is levied on the amount an individual receives from a decedent. As mentioned before, an executor or a person in-charge of a decedent's property is responsible for filing the estate tax, whereas in case of inheritance tax, each individual should file his/her own separate taxes.
The Debate on Estate Taxes
The argument whether estate taxes should be levied is as old as the tax itself. Supporters feel that it is the right way to ensure that the country does not produce too many 'idle rich'. They also claim that these taxes help in circulation of wealth to more deserving people. They support their argument with the fact that an estate tax is a better way to collect taxes as unlike income tax, it does not demoralize hard work. Last but not the least, the proponents are of the opinion that these taxes are absolutely essential to have a more balanced society. Take an example of an heir who will inherit millions of dollars, leaving him with good enough money to last for the rest of his life, and a soldier who is fighting the enemy in far off lands to protect his motherland. If a tax is levied upon the heir inheriting the property, the same money can be used for buying better equipment for defense and other defense related services of the country.
People who oppose estate tax claim that it affects farmers the most as they have to use farms, tools, equipment over the course of their lifetime, and the heirs of farmers are often forced to sell off their land in order to continue their business. They also claim that after the death of a family member, the last thing that the heirs would like to have is the hassle involved in filing returns, etc. People who oppose these taxes also say that when a person is alive, the government already taxes him on several counts and taxing the earnings again after his death equals to 'double-taxation.'