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Economic Growth and Tax Relief Reconciliation Act of 2001

The federal estate tax law was enacted in 1916; 1997 amendments to the estate and gift tax laws raised the amount of unified credit over a nine-year period. In 2001 Congress further amended estate and gift tax laws.

The 2001 legislation increased the amount that is exempt from estate tax, while reducing the maximum tax rates on taxable property. Beginning in 2002 and through 2009, the top federal estate and gift tax rates drops from 55% to 50% in 2002, and then by one percentage point annually until reaching 45% for 2007, 2008, and 2009. Gift tax rates will be reduced on the same schedule as the estate tax rate. The law also substantially increased the amount that individuals can pass to their heirs free of federal estate taxes from $1 million in 2002 and gradually to $3.5 million in 2009.

The 2001 law provided that the federal estate tax will be completely eliminated in 2010. However, the law has a “sunset” provision which means that if Congress passes no additional law, the estate tax laws in effect prior to the Tax Relief Act of 2001 would be reinstated in 2011. This means that in 2011, the estate tax exemption will be $1 million and the top tax rate will be 55 percent, if the law is not amended before then.

The future of federal estate tax law is uncertain. President George W. Bush is in favor of a permanent repeal of the tax. In 2002 Congress narrowly rejected legislation that would have permanently repealed the estate tax.

Unlike the estate tax, the gift tax has no sunset provision in 2010, and taxpayers will still be subject to a lifetime gift tax. From 2002 through 2009, the top marginal estate tax and gift tax rates are the same. For 2010, gifts in excess of the $1 million exclusion amount are subject to a gift tax at a rate equal to the top individual income tax rate, 35 percent.

Inside Economic Growth and Tax Relief Reconciliation Act of 2001