Changes in the Estate Tax Under the Tax Cut and Jobs Act

As part of the sweeping overhaul of the tax code, the threshold for the estate tax has been effectively doubled. The estate tax is levied upon assets that are transferred upon death, for this reason it is colloquially referred to as the “death tax.” For practical purposes, most taxpayers will never pay the estate tax because the tax only applies to large estates and because careful estate planning can help large estates largely avoid the tax.

The Estate Tax

In 2017, the death tax only applied if the estate was valued at over $5.49 million for single-filers and 10.98 million for married couples filing jointly. At this threshold, the tax was unlikely to apply to a large portion of Americans. According to the New York Times, 2.6 million people died in the United States in 2016. During that same year, only 5,219 estate taxes were filed with the Internal Revenue Service, representing a tax that touched upon only 0.2% of deaths during the year.

While the estate tax does not apply to many estates, when it does apply, the eye-wateringly high 40% tax rate can create a significant dent in the estate. For this reason, many taxpayers utilize estate planning techniques to reduce the estate tax and, therefore, the tax burden upon death. The increased threshold reflects a modern trend in America away from estate taxes. In 2001, an estate tax of 55% applied to all estates over $675,000. Since then, the threshold for the estate tax exemption has continued to rise as the estate tax rate has plummeted.

Changes to the Estate Tax under the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act will double the size of the estate that can be transferred at death without paying the estate tax. Starting in 2018, the estate tax will not kick in for estates valued at less than $11 million, or $22 million for married couples filing jointly.

Importantly, the new law makes these tax provisions temporary. Under the Tax Cuts and Jobs Act, the doubling of the estate tax threshold will expire in 2025. If the tax provisions were not extended by Congress and the President before then, the estate tax provisions will revert to 2016 levels – a rate of 40% for estates over $5.49 million. This threshold will, however, be chained to the new consumer price index implemented by the new tax law.

According to the New York Times, this higher threshold would have reduced the number of estates paying the death tax from 5,219 to 2,204 in 2016. Therefore, the higher tax threshold for the estate tax effectively reduced its impact from 0.2% of deaths in 2016 to less than 0.01% of deaths occurring in the year. According to the Congressional Budget Office, this means the number of taxpayers paying the estate tax will drop by 70%. With the death tax applying to even fewer estates, the tax provision’s revenue is expected to drop. Overall, the tax revenue generated by the estate tax will be 30% less under the new law.