Federal Estate and Gift Taxes
Economic and Budget Issue Brief
The federal government uses a linked set of taxes on estates, gifts, and generation-skipping transfers to tax transfers of wealth from one generation to the next and to limit the extent to which wealth can be given away during life to avoid taxation at death. Federal taxes on transfers of wealth at death have been enacted in various forms since 1797, initially to raise revenue during crisis or war, and have been modified periodically over time. The United States has collected revenues from the current form of the tax—an estate tax—since 1916. A gift tax, first introduced in 1924, prevents wealthy individuals from avoiding the estate tax by transferring wealth while they are alive.
Federal transfer taxes have historically made up a relatively small share of total federal revenues—accounting for 1 percent to 2 percent of total revenues in most of the past 60 years. The Congressional Budget Office (CBO) projects that, under current law, federal revenues from estate and gift taxes will be $420 billion, or 1.2 percent of total revenues, over the 2010–2019 period.
Since 1977, less than 2 percent of adults who die each year have typically left estates large enough to be taxable. Because of recent increases in the amount of an estate that is exempt from taxation, a relatively small percentage of estates are taxable today. In 2007, 17,400 taxable estate tax returns were filed; most were for deaths in 2006, representing about 0.7 percent of adult deaths in that year. The average tax rate for taxable estates—calculated as the estate tax liability divided by the value of the net taxable estate (the value minus certain deductions, such as charitable bequests and bequests to a spouse)—has remained near 25 percent since the 1940s, even as the share of estates subject to the tax fluctuated because of changes in the value of the effective exemption amount.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) phased out the estate tax beginning in 2001, primarily by increasing the amount of an estate that is exempt from taxation and by reducing the top marginal tax rate (the rate that applies to the last dollar of an estate). Under that law, the effective exemption amount is $3.5 million in 2009, and the top marginal tax rate is 45 percent. In 2010, the estate tax is temporarily repealed. Starting in 2011, the estate tax is reinstated with an effective exemption amount of $1 million and a maximum marginal tax rate of 55 percent (plus a 5 per-cent surtax on taxable transfers between $10.0 million and $17.184 million).
The scheduled repeal of the estate tax in 2010, followed by a reversion to a $1 million effective exemption amount thereafter, has raised interest in modifying the estate tax. Proposals include making permanent the repeal of the estate tax; maintaining the current system of estate taxation, with estates paying tax on amounts exceeding a specified exemption amount; and replacing the estate tax with an inheritance tax. The House of Representatives recently passed legislation (H.R. 4154) that would permanently retain the estate and gift taxes at the parameters in place for 2009.