Evaluating Shortfalls in Application of Federal Estate Tax

Michael Mundaca

Michael Mundaca

During his tenure at the US Treasury, Michael Mundaca served as the Assistant Secretary for Tax Policy and before his promotion as the Deputy Assistant Treasury Secretary (DAS) for International Tax Affairs. As the DAS for International Tax Affairs, he represented the United States in negotiating global tax treaties. As the Assistant Treasury Secretary for Tax Policy, Michael Mundaca was in charge of national tax policy for all federal taxes, including the federal estate tax.

In this election period, as the debate on the estate tax continues, the question has been asked as to whether the tax is properly structured. Federal estate tax is the tax paid on property such as real estate, cash, stocks, or other assets, passed down from the deceased to their heirs. The tax has a very high exemption level, which currently stands at $5.45 million. This means that only estates whose value is in excess of $5.45 million are liable to pay any federal estate tax.

The high exemption level is the reason many estates are transferred tax-free. In fact, 99.8 percent of all estates in the country owe no federal estate tax. Only the estates of the wealthiest 0.2% of Americans must pay the tax.

Moreover, most taxable estates are taxed at an effective tax rate much lower than the highest statutory rate of 40 percent. In 2013, the average effective estate tax rate was 16 percent. The effective rate is low because estate tax is payable only on the amount in excess of the exemption level. If an estate to be transferred is valued at $7 million, the taxable portion of the estate would be $1.55 million.