Once the tentative estate tax is calculated, the remaining step is to apply credits (if any) that might reduce the tax further. A complete explanation of the estate tax calculation formula is presented in the Estate Planning Adviser's Guide (Form 2450).
Tax credits provide a dollar-for-dollar reduction of the estate tax. There are four credits commonly used in reducing the tentative estate tax to the ultimate tax payable:
The Economic Growth and Tax Reconciliation Act of 2001 significantly increases the estate tax credit between 2002 and 2009. In 2010, the estate tax is repealed but is scheduled to return in 2011 due to application of the "sunset" provision. Meanwhile, the gift tax exclusion amount remains at $1 million without any increases scheduled. The following chart details the estate tax credit amounts between 2002 and 2011.
Year
Estate Tax Applicable Exclusion Amount
Estate Tax Credit Amount
2003
$1,000,000
$345,800
2004
$1,500,000
$555,800
2005
$1,500,000
$555,800
2006
$2,000,000
$780,800
2007
$2,000,000
$780,800
2008
$2,000,000
$780,800
2009
$3,500,000
$1,455,800
2010
Estate Tax Repealed
N/A
2011
$1,000,000
$345,800
Starting in 2002, as a result of the 2001 Tax Act, the state death tax credit has been phased out. The credit decreased at rate of 25 percent per year. Full repeal (i.e., zero credit) occurs in 2005. In 2004, the allowed credit for death taxes was just 25 percent of the full credit. Starting in 2005, taxpayers will instead be able to take a deduction for actual state death taxes paid.
Between 2002 and 2004, a credit is allowed against the federal estate tax for state death taxes paid to any state with respect to property included in the gross estate. There are various types of state and death taxes – inheritance, legacy, estate, and succession taxes. The maximum credit allowable is the lower of (a) the death tax actually paid to the state, or (b) the ceiling amount provided by the chart in I.R.C. Section 2011(b). The credit is limited to specified percentages of the adjusted taxable estate in excess of $40,000. Some states have enacted estate taxes exactly equal to the maximum credit. Practically all states that impose an inheritance tax have also an additional estate tax, designed to absorb the difference between the inheritance tax and the maximum credit should the inheritance tax be less than the maximum credit. In most cases, however, the basic inheritance tax will exceed the maximum amount allowable as a credit.
The credit for foreign death taxes is intended to prevent double taxation. It is allowed for death taxes paid to a foreign country on property included in the decedent's gross estate, and subject to tax in that country. The credit is available only to U.S. citizens or resident aliens.
Where a prior decedent (the transferor) transferred property (which was taxed at death) to the decedent, and the property is included in the present decedent's estate, a credit will be allowed for all or part of the estate tax paid by the transferor's estate on the transferred property. The present decedent must have received the property prior to death and the transferor must have died within ten years before or two years after the present decedent.
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