You pay taxes all your life — but does another tax bill come due when you die? The U.S. has two kinds of death taxes: the estate tax, which is levied by the federal government and certain states, and the inheritance tax, which is levied by a number of other states. The term “death tax” — which refers to both estate and inheritance taxes — was coined in protest by the critics of these taxes.
Find out if your assets are subject to these taxes, and learn everything you need to know about the death tax.
What Is Estate Tax?
Estate tax is the official Internal Revenue Service term for the tax on your right as a deceased person to transfer property at your death. The fair market value of everything you own upon your death or have interests in is counted in your gross estate.
Your gross estate includes:
- Real estate
- Bank accounts
- Your share of a business venture
- All your other assets
After some complicated calculations according to IRS rules, your taxable estate is determined. Then, your tentative tax liability is computed using more adjustments to arrive at your final death tax rate — or net estate tax.
The federal estate tax won’t apply to most individuals; in 2017, for example, it’s reserved for those whose taxable estate is worth more than $5.49 million. Most states that choose to levy estate taxes use the federal threshold, but some use a lower amount. Massachusetts and Oregon, for example, both have a limit of $1 million — anything over that is taxable.
Related: The Cost of Dying in All 50 States
What Is Inheritance Tax?
As of 2017, only six states have an inheritance tax:
- New Jersey
If you reside in one of these states, your beneficiaries are liable to pay an inheritance tax to the state. Also, your heirs might be liable for an inheritance tax on property owned in these states even if you live in another state. Each of these states has different inheritance tax rates, limits and exemptions; find your state on this list of State Tax Agencies and check your state’s rules.
What Is an Intestate Estate?
An intestate estate is the estate of someone who died without leaving a valid will. Estate taxes are calculated the same as for any estate. A court-appointed fiduciary or responsible individual for a decedent uses the rules for an intestate estate when filing IRS Form 1040 and Form 56.
Why Is There an Estate Tax?
The large taxable estates consist mostly of unrealized capital gains that have never been taxed, so wealthy heirs would get money that had never been taxed if it were not for the estate tax. Government policymakers enacted the estate tax in 1916 as a backstop to income tax so wealthy heirs would pay on inherited value that would otherwise go untaxed.
The estate tax is an important source of federal revenue that helps with deficit reduction and leads to less federal borrowing, which strengthens the economy for all Americans. The money raised helps to fund education, national defense, healthcare and other essential programs. A weakening or repeal of the estate tax would cause these programs to face deep cuts and would pass the burden of these costs onto less wealthy taxpayers.