What Is Estate Tax?
Estate tax is a levy on your assets after you die. The federal estate tax exemption in 2021 is $11.7 million. Federal estate tax rates range from 18 percent to 40 percent. The federal government, 12 states and the District of Columbia have an estate tax.
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Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.Read More
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Ebony J. Howard, CPA
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- Published: January 11, 2021
- Updated: August 17, 2022
- 4 min read time
- This page features 9 Cited Research Articles
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Understanding Estate Tax
In 2021, the federal estate and gift tax exemption is $11.7 million per person, up from $11.58 million in 2020.
Married couples can shield up to $23.4 million. Assets transferred to spouses are also exempt from estate tax.
According to the Internal Revenue Service, your gross estate includes everything you own or have certain interests in when you die.
- Cash and securities
- Real estate
- Certain trusts
- Business interests and other assets
The IRS considers the fair market value of your belongings, or what they’re worth today — not what you paid for them or what their values were when you acquired them.
Federal estate tax is only levied on the amount that exceeds the $11.7 million exemption. For example, you can die with $11.6 million in assets in 2021 and not owe estate tax.
Once you exceed the limit, a gradual tax rate is applied.
The tax rate begins at 18 percent for the first $10,000 over the exemption and increases to 40 percent for $1 million or more over the exemption.
Will Federal Estate Tax Affect Me and My Family?
Probably not. Only a small fraction of Americans die with more than $11.7 million in assets.
The federal government has significantly increased the estate tax exemption in recent years.
For example, in 2008, the exemption was $2 million. By 2009, it jumped to $3.5 million and in 2011, it rose to $5 million.
In 2018, the exemption skyrocketed to $11.18 million following President Donald Trump’s signature tax overhaul.
According to the Tax Policy Center, the number of federal estate tax returns dropped from 50,500 in 2001 to just 1,900 in 2020. This accounts for less than 0.5 percent of people who died that year.
The higher exemptions established by The Tax Cuts and Jobs Act in 2018 are set to expire in December 2025.
The exemption then returns to $5 million — adjusted for inflation — in 2026.
Some experts believe this change may come even sooner with a new president in the White House.
State Estate Tax
Just because your estate avoids federal taxation doesn’t mean it will escape it at the state level.
Currently, 12 states and the District of Columbia impose their own estate tax laws — and the state exemption amounts are much lower than the federal exemption.
For example, Massachusetts and Oregon both impose an estate tax exemption of $1 million. Compare that to the federal exemption of $11.7 million.
However, state estate tax rates tend to be lower. At the federal level, the richest estates in the nation are taxed up to 40 percent. The lowest federal tax rate is 18 percent.
On the state side, tax rates may start as low as 0.8 percent and gradually increase to 16 percent for the largest estates in places like Massachusetts, Rhode Island, Illinois, Oregon and others.
The highest state-imposed rate is levied in Hawaii and Washington, where the wealthiest estates exceeding $10 million and $9 million, respectively, are taxed at 20 percent.
Six states also have an inheritance tax. One state — Maryland — collects estate and inheritance taxes.
Inheritance tax is paid by heirs. These tax rates usually depend on the beneficiary’s relationship to the deceased.
For example, surviving spouses are typically exempt from state inheritance tax, and some states tax children of the deceased at lower rates than other relatives.
How to Avoid and Reduce Estate Tax
If you believe your assets will be subject to federal or state estate tax, you may want to explore ways to avoid the cost.
Some simple estate planning techniques can help reduce an unwanted tax burden.
- Give Away Assets to Friends and Family
- One way to reduce your chances of owing estate tax is to simply give away some of your money and assets when you’re still alive. As of 2021, you can give away up to $15,000 per person per year in gifts. The money is also tax-free for recipients.
- Gift Assets to Charity
- You can deduct assets from your gross estate if you leave property to a qualifying charity. You may also consider setting up a donor-advised fund. This gives you an immediate tax deduction for money deposited in the fund and you can then make charitable grants over time.
- Put Your Assets in a Trust
- Establishing a bypass or irrevocable trust can provide a legal way to shield some of your wealth from state and federal estate tax.
- Move to a More Favorable Tax Environment
- Because certain states levy estate and inheritance tax, you may consider moving somewhere with fewer taxes on the wealthy.
The IRS also outlines several deductions that may lower your estate tax bill.
One of the biggest breaks is the unlimited marital deduction. This allows an unrestricted number of assets to be transferred outright to a surviving spouse free from tax.
9 Cited Research Articles
- The American College of Trust and Estate Counsel. (2021, January 1). State Death Tax Chart. Retrieved from https://www.actec.org/resources/state-death-tax-chart/
- Department of Revenue Washington State. (2021). Estate tax tables. Retrieved from https://dor.wa.gov/taxes-rates/other-taxes/estate-tax-tables
- Internal Revenue Service. (2020, November 9). Frequently Asked Questions on Estate Taxes. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes
- Internal Revenue Service. (2020, October 28). Estate Tax. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
- Mengle, R. (2020, October 27). Estate Tax Exemption Amount Goes Up for 2021. Retrieved from https://www.kiplinger.com/taxes/601639/estate-tax-exemption-2022
- Ebeling, A. (2020, October 26). IRS Announces Higher Estate And Gift Tax Limits For 2021. Retrieved from https://www.forbes.com/sites/ashleaebeling/2020/10/26/irs-announces-higher-estate-and-gift-tax-limits-for-2021/?sh=34ef56ce459e
- Waggoner, J. (2020, October 5). 17 States With Estate or Inheritance Taxes. Retrieved from https://www.aarp.org/money/taxes/info-2020/states-with-estate-inheritance-taxes.html
- Tax Policy Center. (2020, May). How many people pay the estate tax? Retrieved from https://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax
- Tax Policy Center. (2020, May). Who pays the estate tax? Retrieved from https://www.taxpolicycenter.org/briefing-book/who-pays-estate-tax