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(Continued from previous article) Now that we’ve determined what makes up the value of the taxable estate – that is to say, the gross value of the estate minus the various deductions, it’s time to figure out what we call the “tentative tax base” from which we will determine the tentative value that needs to be paid once the fate of the decedent’s property is determined.

Calculating the tentative tax base is deceptively easy, although it could be a bit confusing if you’re not quite used to it. Essentially, it’s the taxable estate added to what we call the “adjusted taxable gifts” (that is to say, taxable gifts made after 1976), then determining tax liability based on predetermined tax rates. At the moment, the tax rates are as follows: for sums that fail to be over ten thousand dollars, a tax liability of eighteen percent of the amount is to be levied; for amounts between ten thousand dollars and twenty thousand dollars, the tentative tax is one thousand eight hundred dollars plus twenty percent of the excess over ten thousand dollars; amounts between twenty thousand dollars and forty thousand dollars, it is three thousand eight hundred dollars plus twenty-two percent of the excess over twenty thousand – this goes on, reaching sums that amount to more than one and a half million dollars which are levied with a tentative tax of five hundred and fifty-five thousand and eight hundred dollars with forty-three percent of the excess over one million and two hundred and fifty thousand dollars.

The above system, while looking like a version of the progressive tax rate system, is actually different in that it takes away any kind of tax from the first two million of the taxable estate and gifts (at death and during the lifetime of the decedent respectively), and in effect actually creates a forty-five percent flat tax rate upon the consideration of the unified credit exclusions.

In any case, the tentative estate tax will have the gift tax (which shall be discussed later) deducted from it – the value of the latter will be determined by the rates in effect at the time of the decedent’s passing. Couple this with the credit exclusions, and one would be able to determine the actual amount to be paid as tax in terms of US federal estate taxation.

But before anything else: what ARE credits against the tentative tax that help you determine the amount you’re going to pay? Well the most important thing we have to learn about when we speak of credits against tentative tax is the unified credit. The unified credit is essentially and functionally a kind of exemption or “exempted value” (in other words, a value you don’t have to pay tax for) when it comes to the total of value of the taxable estate and the taxable gifts created during the decedent’s lifetime.  Currently, the unified credit for the purpose of the estate tax is seven hundred eighty thousand, eight hundred dollars.  Each time you use your unified credit for this, your unified credit would diminish.

For a person who dies sometime within the past two years until the present (that’s from 2006 to 2008) the so-called “applicable exclusion amount” happens to be two million dollars. What this means is that if your “adjusted taxable gifts” and your taxable estate combined happens to be less than or equal to two million dollars, you will not be paying any federal tax for them. There will, however, be changes in the near future, because according to the Economic Growth and Tax Relief Reconciliation Act of 2001, the exclusion will be raised to three and a half million dollars next year. Of course, the same act is also going to repeal the estate tax in 2010 (although it’s likely to not be abolished until after 2011), but that may still change. In any case, apart from the unified credit, there is also credit for property that has been taxed before – that is to say, if the inherited estate has a property that was itself inherited within the previous ten years, then that will be excluded from what is considered a taxable value. (To be continued in next article)