Introduction
The estate tax, often referred to as the “death tax,” has a long and storied history in the United States. While the specifics of the tax have evolved over the years, its fundamental purpose has remained consistent: to collect revenue from the wealthiest Americans upon their passing. In this article, we will take a journey through the history of the estate tax, exploring its origins, transformations, and the impact it has had on the country’s fiscal policy.
The Birth of the Estate Tax
The roots of the estate tax in the United States can be traced back to the late 18th century. The first federal estate tax was introduced during the Civil War in 1862. Its primary objective was to fund the war effort. This initial version of the estate tax was relatively modest, with an exemption limit of $1,000 (equivalent to approximately $21,000 today). Over time, the estate tax was repealed and resurrected several times until it became a permanent fixture of the tax code in 1916 with the passage of the Revenue Act of 1916.
The Revenue Act of 1916
The Revenue Act of 1916 marked a significant turning point in the history of the estate tax. It established a tax on the transfer of property upon an individual’s death. This tax was not designed to be a major source of revenue but rather a means of redistributing wealth and preventing excessive concentrations of wealth among the nation’s elite.
Key features of the 1916 estate tax included:
Progressive Tax Rates: The tax rates were based on the size of the estate, with higher rates applied to larger estates.
An Exemption: The first $50,000 (approximately $1.2 million today) of an estate’s value was exempt from taxation.
A Focus on Large Estates: The tax primarily targeted the wealthiest individuals, as the average American’s estate fell below the exemption threshold.
Post-World War II Changes
Following World War II, the estate tax went through several revisions and changes. The exemption limit increased significantly, making it less of a burden on the middle class. However, it retained its progressive structure, meaning the wealthiest Americans still paid higher rates on their estates.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
One of the most notable changes to the estate tax occurred with the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001. This legislation initiated a gradual increase in the exemption limit and a reduction in estate tax rates. These changes were phased in over several years until 2010 when the estate tax was temporarily repealed.
Temporary Repeal and the Return of the Estate Tax
The temporary repeal of the estate tax in 2010 was followed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which reinstated it in 2011. This act set the exemption limit at $5 million (adjusted for inflation) and established a 35% tax rate on estates exceeding this amount.
The American Taxpayer Relief Act of 2012
The American Taxpayer Relief Act of 2012 made significant changes to the estate tax. It increased the exemption limit to $5.25 million (adjusted for inflation) and set the top tax rate at 40%. This act also introduced portability, allowing a surviving spouse to carry over any unused portion of their deceased spouse’s exemption, effectively doubling the exemption for married couples.
The Present and Future
Today, the estate tax continues to impact wealthy Americans, with an exemption limit pf $12,920,000 million for an individual, and $25,800,000 for a married couple. However, the current legislation is set to end in 2026 when the exemption limits will drop to $6,200,000 individually, or $12,400,000 for a married couple.
There is debate on whether or not the exemption will actually be decreased in 2026. We won’t know until the time comes.
What we do know is that currently anything over the exemption is currently taxed at 40%. Wealthy estates use life insurance to cover the cost of taxes at a fraction of the actual cost of the tax itself. This allows for loved ones to receive the assets in full instead of only receiving 60% of anything over the exemption limit.
