The Congressional Research Service (CRS) of the US Library of Congress has explored options for reforming estate taxation as per the R48183 report on 16 September 2024.
The estate tax is imposed on bequests at death, whereas the gift tax applies to inter vivos (during life) gifts. A certain amount of combined estates and gifts – USD 5 million in 2011, indexed for inflation – is exempted from taxation by the federal government.
The American Taxpayer Relief Act established permanent rules for the estate and gift tax for 2013 and subsequent years. The tax revision of 2017, commonly known as the Tax Cuts and Jobs Act (TCJA), temporarily doubled the exemption levels. This increase expires after 2025, absent legislative change.
The tax rate and the exemption level have been subject to legislative changes in recent years. Since these changes began in 2001 with an increase in the exemption amount, the share of descendants paying an estate tax has declined from 2.1% of the population to 0.07% in 2019.
This share will rise to about 0.2% when the TCJA’s increased exemptions expire. Estate tax rates also fell during that period, from 55% in 2000 to 40% currently.
As a result of the exemption increases and rate decreases, the tax as a percentage of GDP fell from 0.3% in 2000 to 0.1%. The share is expected to rise to 0.2% when the increased exemptions expire after 2025.
Exemption level and the expiration of the TCJA
According to the CRS, one potential issue for Congress is whether to allow the higher exclusion to expire.
After 2025, the exclusion will revert to the permanent level established in 2013 and be reduced by half.
As noted above, the expiration of the higher exemption will:
- Increase the estate tax’s coverage from 0.07% to 0.2% of decedents;
- Increase estate tax revenues by USD 15 billion to USD 20 billion.
According to the CRS, two bills introduced in the 118th Congress, H.R. 976 and S. 1226, will make all of the individual changes in the TCJA permanent.
Eliminating the estate tax
Eliminating the Estate Tax During congressional deliberations leading up to the 2017 tax revision, House and Senate bills both proposed an immediate doubling of the exemption level. However, the House proposal also would have repealed the estate tax (and reduced the gift tax rate to 35%) after 2024.
Two bills in the 118th Congress propose this change: H.R. 7035 and S. 1108. Based on the share of the tax in gifts versus estates, repealing the estate tax would cause a revenue loss of 90% of the estate and gift tax, about USD 32 billion in FY2026 and USD 48 billion in FY2028.
Lowering the exemption and increasing the rate
According to the CRS, the bills H.R. 2676 and S. 1178, otherwise known as the ‘For the 99.5 Percent Act’ would introduce
- Graduated rates, ranging from 45% to 65%, and;
- Lower the exemption to USD 3.5 million.
Based on estimates of the revenue gain from a 2021 Joint Committee on Taxation study, the bill, including other provisions discussed below, would raise revenues by about USD 44 billion in FY2028, after the higher exemption levels expire.
The American Housing and Economic Mobility Act of 2024 (H.R. 9245 and S. 4824) would lower
- The exemption to USD 3.5 million;
- Impose graduated rates on estates above USD 13 million ranging from 55% to 65%, and;
- Impose a 10% surtax on amounts above USD 1 billion.
Lowering the rate
One bill, H.R. 7993, has been introduced to reduce the rate to 20%. Based on reducing estate tax revenues by half, the expected revenue loss in FY2028 would be USD 27 billion.
Proposals to address step-up basis
Although a step-up basis is an income tax issue rather than an estate tax issue, the estate tax is sometimes justified as a way to tax some of the unrealised gains in the estate. Step-up in basis discourages realisations of capital gains taxes and is the major reason that there are limits to raising revenue by increasing capital gains tax rates, as these increases will lead to holding more assets until death to avoid the tax.
