Estate Tax: What Is It And Who Has To Pay?
UPDATED: Dec 13, 2023
Whether you anticipate inheriting an estate or plan to leave assets to heirs, having a basic understanding of estate taxes can prove useful even though the majority of Americans are unlikely to be impacted by these taxes. This overview provides insights into the nuances of estate taxes, emphasizing the importance of awareness and offering guidance for those navigating the complexities of this financial landscape.
What Is Estate Tax?
The estate tax, also referred to as the "death tax," is a financial obligation imposed on the assets of a deceased person, contingent on factors like their residence and estate value. While the threat of estate and inheritance taxes exists, a significant number of estates are not liable for federal estate tax. Additionally, numerous states do not impose either estate taxes on the estate itself or inheritance taxes on the recipients of assets from the estate.
In 2017, the Tax Cuts and Jobs Act increased estate tax exemption gradually from 2018 to 2025. It factored in inflation, meaning the exemption is set at $12.92 million (and twice that for married couples) in 2023.
Who Has To Pay The Estate Tax?
In 2023, the IRS applied federal estate tax to individuals with assets exceeding $12.92 million at their death, with estate assets including interests in real estate like homes. However, the majority of people are exempt from estate taxes.
The following is some of the includible property that may be subject to estate taxes:
● Cash
● Stocks and bonds
● Personal property (vehicles, clothing etc.)
● Publicly traded securities
● Jointly held property
States With Their Own Estate Taxes
Most states don’t levy their own estate taxes on top of federal estate taxes, but a handful listed in the following table do. These states and D.C. and their exclusion amounts (the max amount that will not incur additional taxes) are listed below:
| State | Exclusion Amount |
|---|---|
| Connecticut | $12.92 million |
| District of Columbia | $4.53 million |
|
Hawaii |
$5.490 million |
| Illinois |
$4 million |
| Maine | $6.41 million |
| Maryland | $5 million |
| Massachusetts | $2 million |
| Minnesota | $3 million |
| New York | $6.58 million |
| Oregon | $1 million |
| Rhode Island | $1.733 million |
| Vermont | $5 million |
| Washington | $2.193 million |
How Do Estate Taxes Work?
For couples, the first spouse who dies can leave the entire estate to the surviving spouse tax-free. The surviving spouse can then claim the entire $12.92 million federal exemption. The majority of U.S. taxpayers never pay estate taxes.
For example, your spouse leaves you assets worth $2.5 million. You won’t need to pay any estate taxes because the assets are below the exemption. If you also live in a state that does not require state estate taxes, you may not have any estate tax obligations at all. Consult an estate attorney to understand how taxes, if any, may apply.
For estates that exceed the 2023 threshold of $12.92 million, any amount over that threshold is taxed as follows, up to a 40% tax on amounts greater than $1 million.
| Tax Rate | Taxable Amount | What You Owe |
|---|---|---|
| $1 – $10,000 | 18% |
– $0 base tax – 18% on taxable amount |
| $10,001 – $20,000 | 20% |
– $1,800 base tax – 20% on taxable amount |
| $20,001 – $40,000 | 22% |
– $3,800 base tax – 22% on taxable amount |
| $40,001 – $60,000 | 24% |
– $8,200 base tax – 24% on taxable amount |
| $60,001 – $80,000 | 26% |
– $13,000 base tax – 26% on taxable amount |
| $80,001 – $100,000 | 28% |
– $18,200 base tax – 28% on taxable amount |
| $100,001 – $150,000 | 30% |
– $23,800 base tax – 30% on taxable amount |
| $150,001 – $250,000 | 32% |
– $38,800 base tax – 32% on taxable amount |
| $250,001 – $500,000 | 34% |
– $70,800 base tax – 34% on taxable amount |
| $500,001 – $750,000 | 37% |
– $155,800 base tax – 37% on taxable amount |
| $750,001 – $1 million | 39% |
– $248,300 base tax – 39% on taxable amount |
| $1 million+ | 40% |
– $345,800 base tax – 40% on taxable amount |
Estate Tax FAQs
The following are answered FAQ’s regarding estate taxes.
Are estate tax and inheritance tax the same thing?
Often used interchangeably, estate taxes and inheritance taxes are their own distinct concepts with specific differences. An estate tax is deducted from the deceased person's estate before distribution, triggered by assets exceeding $12,920,000 at the federal level (2023). In contrast, inheritance tax applies to inheritors after receiving assets. Some states also may offer exemptions based on asset values.
What is the unlimited marital deduction?
The unlimited marital deduction is a provision in the United States that allows individuals to transfer an unrestricted amount of assets to their spouse at any given time. These transferred assets are exempt from incurring any estate or gift taxes. This provision becomes particularly relevant in the context of estate planning, as it allows for tax-efficient transmission of assets between spouses.
Are gift taxes the same as estate taxes?
No, gift taxes are not the same as estate taxes. The federal estate tax is applicable to property transfers upon death, while the gift tax pertains to transfers made during a person's lifetime.
How do I avoid estate taxes?
To avoid estate taxes, you could create an irrevocable trust account to safeguard your assets and distribute funds as income to reduce the tax burden. Another strategy is to give assets to family and friends within the lifetime exclusion limits, currently set at $12.92 million for an individual and $25.84 million for a couple in 2023, or $13.61 million for an individual and $27.22 million for a couple in 2024. Additionally, enjoying the money through spending and making charitable donations can also be effective in minimizing estate taxes.
The Bottom Line: Estate Taxes Don’t Affect The Majority Of Americans
Ultimately, estate taxes are likely not to affect most people; however, it doesn’t hurt to be informed. The majority of U.S. taxpayers remain exempt from estate taxes, and while federal estate tax thresholds are substantial, varying state regulations add complexity. To navigate these intricacies, individuals are encouraged to consult their state government's official website for specific information.
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Angelica Victor
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