- The estate tax is charged on a person’s assets when they die.
- But it only applies to estates worth more than $11.7 million per person or $23.4 million per married couple.
- Fewer than 2,000 households were estimated to pay estate tax in 2020.
- This article was reviewed for accuracy and clarity by Lisa Niser, an expert on Personal Finance Insider’s tax review board.
- See Personal Finance Insider’s picks for best tax software »
The estate tax is charged on very large estates left behind when someone dies.
While it is somewhat controversial politically, the estate tax has been a part of US tax law on and off since 1797.
Here’s what to know about the estate tax.
What is estate tax?
The estate tax is a tax on your right to transfer property at your death.
Only those with estates valued at over $11.7 million in 2021 (or $11.58 if they died in 2020) are subject to it. This is per person. That means a married couple could potentially have $23.4 million in assets (or $23.16 million for a death in 2020) before they are subject to any federal estate tax.
With this high threshold, the Tax Policy Center estimated in 2020 that fewer than 2,000 households would pay any estate taxes in the US last year. That’s compared to about 50,500 estates that paid the tax in 2001.
In addition to the federal estate tax, 18 states and the District of Columbia also impose estate or inheritance taxes, according to the Tax Foundation.
How the federal estate tax works
The tax is based on the value of an estate.
To calculate the amount of tax owed, take the date-of-death value of most assets (such as cash, securities, real estate, life insurance, trusts, annuities, and business interests) and subtract certain deductions. Allowable deductions include mortgages and other debts, as well as property that passes to a surviving spouse or qualified charity.
Then, add to that the value of lifetime taxable gifts (beginning with gifts made in 1977) and subtract the credit (currently $11.7 million).
If a balance remains, the IRS requires the estate to file Form 706 within nine months after the date of death of a family member, to determine any taxes owed. These taxes are typically paid by the estate itself, not the person who eventually inherits the property or money.
The estate tax rate ranges from 18% to a top rate of 40%. This is a progressive tax, which means you pay a higher rate per dollar as the estate size increases.
Arguments for and against the estate tax
The estate tax has a turbulent history and has been a long-time focus of politicians on both sides of the aisle. The estate tax is so controversial that it actually went away for a period of time: Rates went so low they were effectively eliminated in 2010. The tax was brought back in 2011 and changed significantly in 2017.
Opponents of the estate tax call it a “death tax.” These people argue that income was already taxed when earned, so if left to the deceased’s children, other relatives, or charitable causes, they shouldn’t have to pay additional taxes.
On the other side of the debate, proponents argue that this is a fair and reasonable tax when money changes hands. Just as you most likely pay taxes when you are paid by an employer, receive a large gift, or buy something at a cash register, you should have to pay taxes when receiving a significant inheritance.
The Biden administration is expected to propose several changes to the current tax code, including how estates are taxed.
If your estate is big enough for taxes, consider hiring an expert
If a family member has a sizable estate, you should hire a tax professional and a financial advisor to help you manage the process and assure everything is properly reported and accounted for.
Estate taxes don’t impact many US households, but when they do, costs can add up fast.
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