“Fiscal Cliff” Deal Includes Only Small Change to Estate Tax

As part of the tax compromise Congress approved to avoid tumbling down the “fiscal cliff,” the amount that is exempted from estate taxes will remain the same as it has been for the past two years, although the maximum tax rate will rise by 5 percentage points.

The American Taxpayer Relief Act, which passed the House by a vote of 257 to 167, permanently sets the estate tax exemption at $5 million for an individual (now $5.12 million due to inflation) and $10 million for a couple (now $10.24 million).  (With new inflation adjustments, the exemptions are estimated to rise to about $5.2 million and $10.4 million.)

But Congress did make one change to the prior rules: the maximum tax rate on inheritances above these levels will increase from 35 percent to 40 percent.

The gift tax and generation-skipping transfer tax exemptions will also remain the same as last year, adjusting for inflation, and the estate tax portability provision remains intact.

Although the bill’s provisions would take effect January 1, 2013, and President Obama has promised to sign it into law, technically for now the estate tax has reverted to its 2001 level of a 55 percent tax on inheritances above $1 million.