Even after you die, the IRS isn’t finished with you. The federal government imposes an estate tax on your assets, and several states also impose various “death taxes.” But at the federal level, a generous estate tax exemption means very few people need to worry about making Uncle Sam a beneficiary of their estate.
Read on to learn how federal estate tax works, and find out if your assets might be subject to a state estate tax.
Assets Subject to Estate Taxes
The IRS imposes estate tax based on your gross estate, which is essentially everything that you own at the time of your death. This includes assets like cash, real estate, stocks and bonds, annuities, businesses, cars, jewelry and other personal property.
Special rules might apply for certain assets, depending on the interest you have in them. For life insurance policy owners, for example, the proceeds are included in your taxable estate despite the proceeds not being paid out until after your death, and even if the proceeds are paid to someone other than your estate.
Federal Estate Tax Exemption
The federal estate tax exemption — also referred to as the estate tax exclusion — is $11.4 million per person as of 2019. A married couple can effectively leave behind $22.8 million combined. This exemption is cumulative for gifts made during life as well as your estate at death. Because the exemption is so high, very few people have to file an estate tax return or pay estate taxes. However, this exemption is scheduled to get cut to $5 million in 2026. Although the basic exclusion amount will be reduced in 2026, the IRS’s regulations provide a special rule that effectively allows an estate to compute its estate tax credit using the greater of the exclusion amounts applicable to gifts made during life, or the exclusion amount applicable on the date of death.
In addition to the estate tax — which is a tax on property transferred at death — a personal representative of the decedent might have to pay a gift tax on money or property given during the decedent’s life if it hasn’t already been paid. However, no tax is owed if the gift does not exceed the exclusion amount. You can give $15,000 per year to any person without using any of your exclusion amount. Giving more than that to any person reduces your basic exclusion amount — and the amount you can pass estate-tax-free at your death. Say, for example, you give $115,000 to your child to help them buy a house. Because you gave $100,000 more than the $15,000 annual exclusion, you use up $100,000 of the basic exclusion amount and can only leave $11.3 million estate-tax-free at your death.
Although gifts can be excluded from taxes, they are not deducted from your overall taxable income — there is no gift tax exemption.
Federal Estate Tax Deductions
In the event you do have a taxable estate, those handling your estate can use several deductions to minimize estate taxes. Deductions include:
- Marital Deduction: Any amounts you leave outright to your spouse qualify for the marital deduction. Money left in certain types of trusts for your spouse’s benefit can also qualify for the deduction.
- Charitable Deduction: Assets left to qualifying charities reduce your taxable estate.
- Debts: Any debts of your estate that are still owed at your death reduce your taxable estate.
- Costs of Estate Administration: The expenses of administering your estate are deductible for estate tax purposes, as are any losses incurred during estate administration.
Federal Estate Tax Rates
The federal estate tax rate is 40 percent on any amount that exceeds the federal estate tax exemption. Technically, the tax code contains different tax rates that apply to different sizes of estates, and the highest marginal tax rate begins at assets above $1 million. But because the estate tax exemption is well over $1 million, the highest tax rate applies to all taxable estates. Therefore, individuals who go over the estate tax limit can count on paying the 40 percent rate. There’s been no change between the 2018 estate tax rates and the 2019 estate tax rates.
State Estate Tax Rules
Depending on where you live and own property, your estate could also be subject to state estate taxes.
As of 2019, these 12 states plus the District of Columbia impose estate taxes:
- New York
- Rhode Island
Each state sets its own exemption amount and tax rates and determines which assets can escape the state estate tax. Oregon’s exemption is only $1 million, for example, whereas New York’s exemption is $5.74 million through Jan. 1, 2020.
Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey and Maryland are among the states that impose inheritances taxes on estates, but inheritance taxes work differently than estate taxes. Residents of states with estate tax or inheritance tax should consult an estate planning attorney to minimize the amount of tax owed.
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- Watch: How to Legally Cheat Your Tax Bracket
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Gabrielle Olya contributed to the reporting for this article.