Wealth Tax

Wealth Tax Definition

Wealth tax is type of tax levying on the aggregate value of all household items purchased. They include owner occupied house, cash, bank deposits, funds, savings in insurance and pension plans, investment in real estate and unincorporated businesses and corporate stock, financial securities and personal trusts.

Existing Wealth Taxes in Different Countries:

France: a progressive rate from 0 to 1.8% of net assets.

Switzerland: a progressive rate with maximum of 1.5% is levied on the net assets.

Netherlands: 1.2% on possessions like savings, shares, houses etc. things like furniture, car are excluded.

Norway: up to 0.7% municipal and 0.4% national a total of 1.1% is levied on assets exceeding 470,000 Norwegian currency.

India: wealth tax is 1%on wealth exceeding Rs. 30, 00,000. Non-residents returning to India are given exemption for 7 years.

In U.S.A. property taxes are annual taxes assessed on the market value of real estate. It ranges from 0.4% in Alabama to 4% in New Hampshire assessed both locally and by state governments.

Revenue Act of US:

The revenue act was the American Congress’s attempt to recover the financial crisis during the great economic depression of 1932. During this depression the Federal Reserve underwent a one-third drop in the money supply across the nation due to bank closures, the stock market crash and subsequent economic fear among the Americans.

The congress’s plan was to restore the tax levels which were already incorporated in the year 1924 to aid the economic crisis. And also increasing the surtax rates and reducing exemptions made for individuals and married couples.

The Revenue act was signed by President Hoover on June 6 1932 and it is according to the Cato Institute. This is largely known as the “Largest peacetime tax increase in U.S. history.

Under the new tax act

  • Individual tax rates were increased from 25% to 63%
  • Personal exemption were reduced to $1000 for individuals and $2500 for married couples
  • Excise taxes were increased. These excise taxed products include jewelry, refrigerators, cameras and soft drinks.

There exists an Estate Tax which is a tax imposed on the transfer of an estate of a deceased person whether it is transferred by will or according to the state laws. This tax is part of “Unified Gift andEstate tax system”.
The other tax is the Gift Tax. This is imposed on the transfers of property during a person’s life.

In addition to federal government state also levies a tax which is nothing but the estate tax, but in state’s version it is called as inheritance tax. Since 1990s the opponents of this tax use the term “death tax” instead of inheritance tax.

If an estate if left for spouse or a charitable organization tax is not imposed. But for the transfers of property from intestate estate or trust, or payment of certain life insurance benefits or financial account sum to beneficiaries certain amount of tax is imposed.

Federal estate tax
This tax is levied on the transfer of the taxable estate of each and every decedent who is a citizen or resident of United States. This is done by calculating the gross estate amount, making some deductions from it and arriving at a smaller amount called the taxable estate.
Gross Estate
This is considered to be the value of all property interests of the decedent at the time of death. To these interests the following are to be added generally not owned by the decedent at the time of death.
  • The value of the property to the extent of an interest held by the surviving spouse as a dower or curtesy.
  • The value of certain items of property in which the decedent had at any time made a transfer during 3 years immediately preceding the date of death  (even if the property was no longer owned by the decedent at the time of death) , other than certain gifts and other than property sold for full value.
  • The value of certain property transferred by the decedent before death for which the decedent retained a life estate or retained certain powers.
  • The value of certain property in which the recipient could through ownership have possession or enjoyment only by surviving the decedent.
  • The value of certain property in which the decedent retained a reversionary interest, the value of which exceeded by five percent of the value of the property.
  • The value of certain property transferred by the decedent before the death where the transfer was revocable
  • The value of certain annuities
  • The value of certain jointly owned properties such as assets passing by operation of law or survivorship
  • The value of certain powers of appointment
  • The amount of proceeds of certain life insurance policies
  • Bank accounts other financial instruments which are payable on death or transfer on death are included in the taxable estate.
After the determination of the gross estate, certain deductions are allowed in arriving at the value of the taxable estate. Deductions include:
  • Funeral expenses, administration expenses and claims against the estate
  • Certain charitable contributions
  • Certain items of property left to the surviving spouse
The tax base is the sum of the taxable estate and the adjusted taxable gifts. The tax is calculated by the following rates:
  • For amounts not greater than $10,000 the tax is 18% of the amount.
  • Between $10,000 and $20,000 the tax is $1800 plus 20% of the excess over $10,000.
  • Between $20,000 and $40,000 the tax is $3800 plus 22% of the excess over $20,000.
  • Between $40,000 and $60,000 the tax is $8200 plus 24% of the excess over $40,000.
  • Between $60,000 and $80,000 the tax is $13000 plus 26% of the excess over $60,000.
  • Between $80,000 and $100,000 the tax is $18200 plus 28% of the excess over $80,000.
  • Between $100,000 and $150,000 the tax is $23800 plus 30% of the excess over $100,000.
  • Between $150,000 and $250,000 the tax is $38,800 plus 32% of the excess over $150,000.
  • Between $250,000 and $500,000 the tax is $70,800 plus 34% of the excess over $250,000.
  • Between $500,000 and $750,000 the tax is $155,800 plus 37% of the excess over $500,000.
  • Between $750,000 and $1,000,000 the tax is $248,300 plus 39% of the excess over $750,000.
  • Between $1,000,000 and $1,250,000 the tax is $345,800 plus 41% of the excess over $1,000,000.
  • Between $1,250,000 and $1,500,000 the tax is $448,300 plus 43% of the excess over $1,250,000.
  • Before the year 2007 additional tax brackets applied for amounts over $2,000,000 with marginal rates of up to 55%.

There also exists a unified tax credit against this tax which eliminates any amount tax over $3,500,000 of the estate. This applies if the person expires in the 2006, 2007 and 2008 which is equivalent to an amount if $2,000,000 or less. This credit rises to $3,500,000 in 2009 and is repealed in 2010.

The gift tax exemption is limited to $1,000,000 and does not increase there after as does the estate tax.

Requirements for Filing Return and Paying Tax

The individual responsible for filing the returns who is also due to pay the tax is done by the executor or the person in possession of the estate. This individual has to fill in FORM 706 with the Internal Revenue Service. The return must contain detailed information as to the valuations of the estate assets and theexemptions claimed and the deadline for filing the form is 9 months from the date of death of the decedent. The payment can be extended but not to 12 months but filing should be within 9 months.

Exemptions and Maximum Tax Rates:

Year Estate Tax Exemption Highest Rate
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $ 2 million 46%
2007 $ 2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 Taxes eliminated 0%
2011 $ 1 million 60%

Gift exemption Amounts

Year Gift Exemption (Single) Gift Exemption (Married)
2000 and prior $10,000 $20,000
2001 -2005 $11,000 $22,000
2006-2008 $12,000 $24,000
2009-2010 $13,000 $26,000
2011 and beyond $13,000 plus inflation adjustment $26,000 plus inflation adjustment

Wealth Tax Example
Let us assume there is an estate worth $3.5 million and there are two beneficiaries in 2006. The maximum allowable tax credit is $2 million for that year. So the taxable value is $1.5 million. The tax rate is 46% on that $1.5 million therefore the tax to be paid is $690,000 and each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion. So the total they would be getting is $1,405,000.