Cecily Zamora
Estate tax is a federal tax on the transfer of a person's estate upon their death. The tax applies to property transferred by will or, in the absence of a will, according to state laws of intestacy. The estate tax is part of the federal unified gift and estate tax, with the gift tax applying to transfers during a person's life. The federal estate tax has been in place since 1916, though it has been amended numerous times. In addition to the federal government, several states also impose estate and inheritance taxes. The estate tax laws have been periodically debated, with opponents referring to it as the death tax and supporters as the Paris Hilton tax.
| Characteristics | Values |
|---|---|
| What is it? | A federal tax on the transfer of the estate of a person who dies |
| What does it apply to? | Property that is transferred by will or, if the person has no will, according to state laws of intestacy. Other transfers that are subject to the tax can include those made through a trust and the payment of certain life insurance benefits or financial accounts. |
| What is the gross estate? | The value of all the property interests of the decedent at the time of death. |
| What is the taxable estate? | The gross estate minus deductions. |
| What are the deductions? | Funeral expenses, administration expenses, and claims against the estate, certain items of property left to the surviving spouse, inheritance or estate taxes paid to states or the District of Columbia, etc. |
| What is the applicable exclusion amount? | This has varied over the years. For 2006, 2007, and 2008, it was $2,000,000. For 2009, it was $3,500,000. The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the previous estate tax exemption amount to $11.18 million per individual for 2018. The BEA for 2019 was $11.4 million and for 2020, it was $11.58 million. |
| What is the tax rate? | The federal estate tax ranges from 18% to 40%. |
| What is the threshold for paying federal estate tax? | In 2024, the threshold was $13.61 million and in 2025, it was $13.99 million. In 2026, the threshold will be $15 million. |
| Do states levy estate taxes? | Yes, several states and the District of Columbia levy estate taxes. Some states have lower asset thresholds than the federal government. |
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Estate tax vs. inheritance tax
Estate tax and inheritance tax are both referred to as "death taxes", but there are distinct differences in how they are applied. An estate tax is levied against the estate of a person who dies, including property transferred by will or according to state laws of intestacy if the person has no will. The estate tax is based on the total value of cash, investments, property, and other assets. It is a federal tax, and only the estates above a certain value need to file estate tax returns. For 2025, if the decedent is a US citizen or resident, a return is generally only required for estates worth more than $13.99 million. The federal estate tax rate ranges from 18% to 40%.
An inheritance tax, on the other hand, is levied against the beneficiaries, or those who receive something from the deceased's estate. It is paid by the beneficiaries on what they receive, and the amount each person pays may vary depending on how much they receive and their relationship to the deceased. Only six states currently impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. These states use various exemptions and tax rates. For example, in New Jersey, surviving spouses, parents, children, and grandchildren are exempt from the tax, but a brother, sister, niece, or nephew can pay a tax rate of up to 16% on the inheritance.
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Federal estate tax
The federal estate tax has been in place since 1916 and has been amended numerous times. Under the current system, individuals can transfer up to a specified amount in money and other property without incurring federal estate tax liability. The estate tax exemption amount is $13.61 million in 2024 and $13.99 million in 2025. If the value of an estate exceeds this amount, a federal estate tax return must be filed. The federal estate tax rate ranges from 18% to 40%.
The starting point for calculating federal estate tax is the "gross estate," which includes the fair market value of all the property and assets owned by the decedent at the time of death. Certain deductions are then allowed to arrive at the "taxable estate." These deductions may include funeral expenses, administration expenses, mortgages and other debts, property passing to a surviving spouse, and qualified charities.
The Tax Cuts and Jobs Act (TCJA), passed in December 2017, temporarily increased the estate tax exemption amount to $11.18 million per individual for the years 2018 to 2025. After December 31, 2025, the exemption amount will return to $5 million, adjusted for inflation.
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State estate tax
Estate taxes are levied on the transfer of a person's estate upon their death. This includes property transferred by will or, in the absence of a will, according to state laws of intestacy. The estate tax is calculated based on the fair market value of the estate's assets at the time of death, rather than the purchase price. This means any appreciation in the value of the assets will be taxed, while beneficiaries are protected if the value of the assets has dropped.
In addition to federal estate taxes, 12 states and the District of Columbia impose their own estate taxes. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Maryland is the only state that imposes both an estate and an inheritance tax.
It is important to note that estate taxes are distinct from inheritance taxes, which are levied on the beneficiary receiving the assets. While estate taxes are paid by the estate before assets are distributed, inheritance taxes are paid by the recipient based on the value of the bequest received. Six states impose inheritance taxes, with Kentucky and New Jersey having the highest top rate of 16%.
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Taxable estate
A taxable estate is the total value of a deceased person's assets that are subject to taxation. The net assets subject to taxation are calculated by subtracting liabilities and the prescribed tax-deductible portion of assets left behind by the deceased that cross a minimum threshold, below which no estate tax is levied. The size of a taxable estate is determined by accounting for all assets less liabilities possessed by the deceased. This includes investment holdings such as cash, stocks, and bonds, as well as real estate and property such as cars, buildings, and collectibles.
The taxable estate becomes relevant when an heir inherits the person's assets and must pay estate taxes on those assets. The heir will only owe estate taxes on the taxable estate, so it is important for the heir to know what portion of the estate qualifies as taxable. Estate tax, and by extension, the taxable estate value, typically does not apply if the named beneficiary is a living spouse because spouses are eligible for an unlimited marital deduction. However, when assets are passed on to a child, sibling, or another beneficiary other than a spouse, the taxable estate comes into play.
To determine the total taxable estate, the value of the estate's total assets is calculated, and then any deductible expenses are subtracted. These deductible expenses may include funeral expenses, debts owed by the deceased at the time of death, and the value of the assets passed on to the deceased's spouse. Deductible debts may include credit card debt, lines of credit, mortgages, and personal loans. Administrative costs for settling an estate also count as deductions.
The estate tax is a federal tax on the transfer of a person's estate upon their death. It has been in place since 1916, although it has been amended many times. The estate tax is part of the federal unified gift and estate tax system, which also includes the gift tax (imposed on transfers before death) and the generation-skipping transfer tax. Under the current Federal estate tax system, individuals can transfer up to a specified amount in money and other property without incurring Federal estate tax liability. The estate tax exemption amount for 2024 is set at $13.61 million. The Tax Cuts and Jobs Act (TCJA), passed in December 2017, temporarily increased the exemption amount to $11.18 million per individual until December 31, 2025. The applicable exclusion amount was $2,000,000 for deaths occurring in 2006, 2007, or 2008, and the estate tax was repealed for estates of decedents dying in 2010. The 2010 Act reinstated the step-up in basis rule, which allows for a stepped-up basis in the property value to the date of death, eliminating any capital gains tax liability.
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Estate tax exemption
Once the "Gross Estate" is determined, certain deductions are allowed to arrive at the "Taxable Estate". These deductions can include funeral expenses, administration expenses, mortgages and other debts, property passing to a surviving spouse, and qualified charities. The estate tax exemption amount is set by law and is subject to change. For example, the Tax Cuts and Jobs Act (TCJA) passed in December 2017, temporarily doubled the previous estate tax exemption amount to $11.18 million per individual until December 31, 2025. After this date, the exemption amount will return to $5 million but will be adjusted for inflation.
It is important to note that the estate tax exemption is separate from the gift tax exemption. The gift tax applies to transfers of property during a person's life. In 2024, the federal estate tax exemption amount is $13.61 million per individual. This means that an individual can transfer up to this amount of assets during their lifetime or at death without paying federal gift or estate taxes.
Additionally, state-level estate taxes may apply depending on the state of residence. For example, Massachusetts has an estate tax exemption amount of $2 million, which is separate from the federal exemption. It is advisable to plan ahead and implement estate planning strategies to reduce the taxable estate and maximize the amounts transferred to heirs or charity.
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Frequently asked questions
Estate tax is a federal tax on the transfer of a person's property after their death. The tax applies to property that is transferred by will or, if the person has no will, according to state laws of intestacy.
The exemption amount varies by year. For 2024, the exemption amount is $13.61 million, and for 2025, it is $13.99 million. The exemption amount is scheduled to drop to $5 million in 2026, adjusted for inflation.
The gross estate includes the fair market value of all property and assets owned by the deceased at the time of their death. This can include cash, securities, real estate, insurance, trusts, annuities, business interests, and other assets.
