With all of the debate among federal legislators over taxation and tax rates, one might assume that the federal estate and inheritance taxes have disappeared. The federal estate tax has been a topic of heated conversation in the first part of the 21st century, but efforts to eliminate it haven't been successful. What has happened, however, is a series of changes that affect who pays how much tax.
A series of tax cuts implemented by the federal government in 2001 were set to expire at the end of 2010. For estate taxes, that would have meant a reversion to a fixed exemption amount of $1 million, which would not increase annually to reflect inflation, and a maximum tax rate of 55 percent on estates. Essentially, a large number of previously exempt estates would suddenly face a tax rate that, if not handled properly, could have cost more than half of the amount inherited [source: Pacific Life].
But in late 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, also known as the 2010 Tax Act. This act capped the top estate tax rate at 35 percent and provided for $5 million per taxpayer in estate tax exemption [source: Herpe]. The act didn't do away with inheritance or estate taxes, but it improved the picture for many taxpayers who will receive inheritances this year.