Q:

Kerry Kerstetter,

 

Your Estate & Gift Tax page is well laid out and quite informative. However, I have one question for clarification. In your example of one dying in 2005 with an estate valued at $1,700,000.00, you mention that, because of the current exclusion, only the “overage” of $200K would actually be taxed. You also mention that it would be taxed at 45%, per the table following further down that page. Would that $200K actually be taxed at only 32%, that being  the  actual taxable amount, per the chart heading. Or is the actual taxed amount taxed at the rate for the entire estate value?

 

I would see owing 32% of $200K, or a total estate tax burden of $64,000.00. Am I mis-interpreting your table and verbiage?

 

It is a critical question and I thank you for your attention to this query.

A:

The verbiage on my website is accurate.

The way the estate tax exclusion works is that it effectively wipes out the lower rate brackets.  On the estate tax form (706) itself, it shows up as a credit against the total tax on the full taxable estate.

The net effect of the way this is set up is to subject the excess taxable estate to the next marginal tax rate.  A net estate  of $1,700,000 falls in the 45% bracket. Since the current exclusion wipes out the first $1,500,000, this leave the additional $200,000 still in the 45% bracket, for a tax of $90,000.

I know this is confusing; but that is how our rulers in DC like it to be.  As always, anyone with an estate large enough to be subject to tax should be working with a tax pro.  Estate tax returns are definitely not a do-it-yourself area; especially since a very large percentage of them are audited by IRS.

Kerry Kerstetter

Follow-Up:

Superbly logical and communicated response, sir.

Thanks!