What Percentage of Inherited Money Is Taxable? | eHow
Taxes on inherited wealth can be controversial. On the one hand, defenders argue that these taxes encourage a more egalitarian society. On the other hand, critics argue that they end up being punitive and take money from families that can't afford to lose it. The estate tax was temporarily phased out in 2010, only to be renewed under President Barack Obama in 2011.
Because of a legislative compromise that was worked out between President Obama and representatives of the Republican majority in U.S. House of Representatives, the estate tax was allowed to go back into effect during 2011 and 2012. Any wealth left by an individual with a net value under $5 million, however, was exempted. Couples with a combined estate valued at less than $10 million were also exempted.
As part of the deal, estates valued at higher than the exemption amount are now taxed at a rate of 35 percent. This is far from being certain in the future, however, as the compromise is set to expire in two years. The rates are set to revert to their previous level of 45 percent of total wealth, and an exemption of only $1 million, if no other action is taken.
People use many methods to avoid the estate tax. Perhaps the most common is to gift a part of your wealth before you die. As a part of the same tax deal worked out in 2010, individuals are allowed to gift a total of $5 million over a lifetime before paying a gift tax. Every year an individual is allowed to gift up to $13,000 each to separate people. This is not retroactive, any gift you make to a person will only count as a gift for the year it was given. You cannot ,say, go back 20 years and gift $13,000 for every year a child has lived.
One problem with having so much controversy surrounding a particular tax is that it can create uncertainty in how it will be implemented from one year to the next. One of the most damaging phenomenons in any economy is uncertainty. This has been noted by many economists, such as Federal Reserve Chairman Ben Bernanke. As policymakers continue to rely on temporary extensions of tax cuts, they make it difficult for individuals to plan for the future.
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