Tax Reform: Estate and Gift Tax
Updated November 17, 2017
Tax Reform: Estate and Gift Tax
The estate and gift tax is a unified tax, so that assets
allowed only for the business portion of assets and only if
transferred as gifts during a person’s lifetime are combined
35% of the estate is in a farm or closely held business.
with those transferred at death (bequests) and subject to a
single rate schedule. The tax is imposed on the decedent’s
Small businesses are also allowed to value their assets at
estate, and the rate structure applies to total bequests and
use as a farm or business. This provision is particularly
gifts given; heirs are not subject to tax.
beneficial to farms and allows a reduction in the estate
value of up to $1,120,000 in 2017. It means, for example,
Rates and Basic Exemptions
that the value of the farm will be what it could be sold for if
The exemption for 2017 is $5.49 million, and it is indexed
restricted to farm use rather than, for example, to be
for inflation. Although the rates of the tax are graduated, the
subdivided for development. Heirs are required to continue
exemption is applied in the form of a credit and offsets
use of the assets as a farm or business for 10 years.
taxes applied at the lower rates. Thus the taxable estate is
subject to a flat 40% rate.
Farmers and other landowners may also benefit from
conservation easements, a perpetual restriction on the use of
Individuals are allowed to exempt annual gifts made in
the land. In addition to the reduction in value due to the
2017 of $14,000 per recipient, which are not counted as part
easement itself, an exclusion of up to 40% of the restricted
of the lifetime exemption. The annual gift tax exemption is
value of the land, capped at $500,000, is allowed.
indexed for inflation in $1,000 increments. A generation-
skipping tax is also imposed, to address estate tax
Step-up in Basis for Appreciated Assets
avoidance through gifts and bequests to a later generation.
Heirs take as their basis (the amount to be deducted from
the sales price) for purposes of future capital gains the value
Other Exemptions and Deductions
of the asset at the date of the decedent’s death. This
Transfers between spouses are exempt. Estates are allowed
treatment is referred to as step-up in basis and means that
to take deductions for charitable contributions and
no capital gains tax is paid on the appreciation of assets
administrative expenses; to take a deduction for taxes paid
during the decedent’s lifetime. For example, if a decedent
on estates and inheritances imposed by states; and to
purchased stock for $100,000 and the value of the stock at
exempt up to $5.49 million in remaining assets from the
the time of death were $200,000, if the heir sells the
tax.
property for $250,000 a gain of $50,000 is recognized and
the $100,000 of gain that accrued during the decedent’s
A spouse can inherit any unused exemption. Thus, if a
lifetime is never taxed. The step-up rules do not apply to
husband dies and leaves an estate of $3 million, the
gifts, in which carryover basis is applied. In that case, the
remainder of his $5.49 million exemption can be used by
original basis of $100,000 would be carried over and the
his wife, whose exemption would be increased by the $2.49
gain would be $150,000.
million difference.
Differences in the Treatment of Bequests and Gifts
Special Provisions for Small Businesses, Farms, and
Aside from the different exemption levels and basis step-up
Landowners
in some estate tax rules, there are other differences between
A series of provisions benefit small businesses, including
the taxation of gifts and bequests. The gift tax is tax
farms or landowners. These include the ability of family
exclusive (i.e., the tax is imposed on the gift net of the tax),
businesses to pay any estate tax due in installments with
whereas the estate tax is tax inclusive (i.e., the tax is applied
only interest payments during part of the installment period,
to the estate inclusive of the tax). To illustrate, consider a
special use valuations, and conservation easements.
50% tax rate. Assuming the exemption is already used, to
Minority discounts, although granted by courts rather than
provide a gift with an after-tax value of $1 million the gift
specifically in the law, may also benefit small businesses.
giver would have to transfer $1.5 million: the tax rate of
Minority discounts are allowed when assets are left to a
50% is applied to the gift of $1 million for a $0.5 million
family partnership in which no individual has a controlling
tax. To provide a net amount of $1 million for a bequest, $2
share and are thus deemed to be worth less than the current
million is required: a tax of $1 million (50% of $2 million)
market value for that reason.
and a net to the heir of $1 million. Another way of stating
this is that the gift tax rate, if stated as a tax inclusive rate
Although the estate tax return is due within nine months of
like the estate tax, would be 33%. Thus for a 40% estate tax
death, small businesses are allowed to defer payment
rate, the gift tax rate equivalent is 28.6% (0.4/(1+0.4)).
(except for interest) for the next five years, and pay the
remaining installment payments over 10 years. Because the
last interest payment and the first installment coincide, the
overall delay in full payment is 14 years. The benefit is
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link to page 2 Tax Reform: Estate and Gift Tax
Estate and Gift Tax Revenue and
Coverage
Businesses and Farms
According to Congressional Budget Office (CBO) baseline
All Estates
All
Small
budget projections, the estate and gift taxes are estimated to
raise $281 billion between 2018-2027. Over the time period
Number of
5,460
600
80
receipts are projected to slowly increase due largely to
Taxable
growth in wealth exceeding inflation.
Returns
As a result of the estate tax exemption level, relatively few
Estate Taxes
$19,950
$2,350
$30
decedents will have estates that face the estate tax. Overall,
Paid (mil ions)
less than 0.5% of all estates are required to file an estate tax
Source: Urban-Brookings Tax Policy Center, “Microsimulation
return with less than 0.2% having to pay the estate tax.
Model,” version 0217-1, Recent Proposals.
As shown in Table 1, an estimated 11,300 estate tax returns
Recent Reform Proposals
will be filed in 2017. According to the Urban-Brookings
H.R. 1 and the Senate Finance Committee’s chairman’s
Tax Policy Center, 88% of estate tax revenue will come
mark to the “Tax Cuts and Jobs Act” would each double the
from the estates of decedents who were in the top 10% of
estate tax exemption immediately and retain step-up basis.
the income distribution. While business owners and farmers
H.R. 1, however, would repeal the estate tax for years after
are more likely than the general population to pay the estate
2025.
tax, coverage is limited among small business owners and
farmers whose estates are most likely to have limited liquid
The House “Better Way” tax reform blueprint proposed to
assets.
eliminate the estate tax. The blueprint does not specify
whether the gift tax or step-up basis would be eliminated or
Table 1. Estimated Estate Tax Coverage, 2017
retained.
Businesses and Farms
This In Focus is part of a series of short CRS products on
All Estates
All
Small
tax reform. For more information, visit the “Taxes, Budget,
& the Economy” Issue Area Page at www.crs.gov.
Number of
11,300
1,300
300
Returns
Donald J. Marples, Specialist in Public Finance
IF10704
https://crsreports.congress.gov
Tax Reform: Estate and Gift Tax
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