At the beginning of 2013, a federal compromise was reached which seemed to put to rest the uncertainty surrounding the estate tax. Based on the January law, the federal estate tax excludes property up to $5.25 million this year, with that figure set in the future and pegged for inflation. The top tax rate for assets over that amount is 40%, representing a slight increase from the previous level of 35%. In addition, the new law keeps transfers between spouses tax-free and makes “portability” permanent. Portability is the tool that allows one spouse to take advantage of the other spouse’s unused exemption.
Importantly for New York residents, all of those details apply only to the federal estate tax. There are still New York inheritance taxes to consider which take effect at a far lower level–$1 million.
The Future
Even though the federal law passed in January appears to be “permanent,” in reality there is nothing about federal law which cannot be changed. Advocates on both sides of the aisle continue to have differences of opinions of the estate tax, with some calling for its complete elimination and other seeking to lower the exemption level. As a result, the tax may be used as a bargaining chip in any federal negotiation.
Are any estate tax changes in the works now?
The Republican Chairman of the House Ways and Means Committee, Representative Dave Camp, is actually working on legislation that would dramatically alter the U.S. Tax system. The proposed legislation includes a wide range of general changes to tax law, including lowering rates for both individuals and corporations while eliminating “loopholes.” Rep. Camp previously claimed that he intended to release the proposal this year, though he recently conceded it may not be ready until early next year.
However, according to a report this week from Bloomberg, when asked about the estate tax specifically, Camp said, “I don’t think that policy needs the reform that the rest of the code does.” In other words, it is unlikely that the estate tax will be changed as part of this proposal. And if the Republican chairman of this powerful committee does not believe the tax needs revision, then, as a practical matter, it is near certain that such a change won’t take place…at least in the short term. With a divided Congress and many other issues taking priority, the best current guess is that current federal estate tax details will remain unchanged.