An estate tax is most notably levied at the federal level, and it’s charged to a decedent’s estate before their assets pass on to their beneficiaries. Most estates won’t trigger the federal estate taxthough, as it only applies to estates worth $13.61 million in 2024 and $12.92 million in 2023, minus any applicable gifts. Because this tax can have a significant effect on your beneficiaries, it’s best to plan for it in your estate plan if you think your estate may trigger it. Some people work with a financial advisor to maximize an estate plan for their loved ones.
What Is the Federal Estate Tax?
The estate tax is levied by the government on estates when you die and pass on your assets to heirs. If your estate has a high enough value after you pass away, then you’ll have to pay estate taxes on anything you’re looking to bequeath. This could include cash, real estate, retirement accounts or a range of other assets.
For 2024, the federal estate tax threshold is $13.61 million for individuals, which means married couples don’t have to pay estate if their estate is worth $27.22 million or less. For 2023, the threshold is $12.92 million for individuals and $25.84 million for married couples.
Federal Estate Tax Rates
To make things simple, if someone passes away in 2024 and their estate is worth $13.61 million or less, they don’t need to worry about the federal estate tax. However, any estates worth more than that are taxed only on the amount that surpasses the $13.61 million threshold. For most of the federal estate tax tiers, you’ll pay a base tax, as well as a marginal rate.Current federal estate taxes max out at 40% for taxable amounts greater than $1 million.
Federal Estate Tax Rates
| Taxable Amount | Estate Tax Rate | What You Pay |
| $1 – $10,000 | 18% | – $0 base tax – 18% on taxable amount |
| $10,000 – $20,000 | 20% | – $1,800 base tax – 20% on taxable amount |
| $20,000 – $40,000 | 22% | – $3,800 base tax – 22% on taxable amount |
| $40,000 – $60,000 | 24% | – $8,200 base tax – 24% on taxable amount |
| $60,000 – $80,000 | 26% | – $13,000 base tax – 26% on taxable amount |
| $80,000 – $100,000 | 28% | – $18,200 base tax – 28% on taxable amount |
| $100,000 – $150,000 | 30% | – $23,800 base tax – 30% on taxable amount |
| $150,000 – $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 |
For example, let’s say your estate is valued at $14.05 million in 2024. That means your total taxable estate is $440,000, as it’s worth that much more than the $13.61 million threshold. At the appropriate tax tier, you’ll pay the base rate of $70,800, plus an additional $64,600 ($190,000 taxed at 34%). That comes out to a total estate tax of $135,400.
Which States Levy an Estate Tax?
If you die as a resident of certain parts of the country, your estate may also be subject to a state tax. As of 2024, Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, Hawaii and the District of Columbia all levy estate taxes. That means that the estates of people who live in these states may face estate taxes at both the federal and state levels.
The aforementioned states’ estate tax thresholds range from $1 million in Oregon and Massachusetts to $12.92 million in Connecticut. Rates also vary, so be sure to check your state’s website to see what you could pay.
The Estate Tax Exemption
In 2011, estates and lifetime gifts had a combined exemption of $5 million in
asset value, indexed for inflation. This exemption was made permanent in 2013 and was
$5.49 million for an individual or twice that for a couple for 2017.
However, the tax plan that President Trump signed in December of that year increased that exemption to $11.18 million for the tax year 2018. The exemption rose to $11.4 million for 2019, $11.58 million for 2020, $11.7 million for 2021, $12.06 million for 2022 and $12.92 million for 2023. For tax year 2024, the exemption is $13.61 million. If your estate is in the ballpark of the estate tax limits and you want to leave the maximum amount to your heirs, you’ll want to do some estate tax planning.
If you’re in charge of paying estate taxes for a deceased loved one, you might want to enlist a tax accountant and an estate lawyer to help you shoulder that burden. In addition to estate taxes, you may need to file separate income taxes for the estate if their estate is generating income above IRS limits.To file a U.S. estate tax return, you’ll needa tax ID number for the estate. An estate’s tax ID number is called an “employer identification number” or EIN.You can apply for a number online, by mail or by fax.
If you want to limit your exposure to the estate tax you might want to start giving some money away. You can make a charitable donation and deduct it at tax time, or give it to the heirs whose inheritance would otherwise take a hit from estate taxes. For 2023, every single filer or member of a married couple can give up to $17,000 as a gift, and not just to one person each. That limit applies to as many people as you want. If you give more than $17,000 to any one beneficiary, you will have to pay the federal gift tax rate, which is the same as the estate tax rate of 18% to 40%.
What Is the Estate Tax Deduction?
The estate tax deduction is the IRS’ way of preventingdouble taxation.Sometimes, the estate of a deceased will still generate income. This could be for a property sale that hasn’t gone through by the time the owner dies. That kind of income is known as Income in Respect of Decedent (IRD).
A large estate might face double taxation at the federal level – the regular estate tax followed by the income tax on the IRD. The estate tax deduction lets you deduct the portion of the estate tax paid for the IRD from the income tax on that IRD. This ensures that the same assets aren’t taxed twice.
The History of the Estate Tax
Estate taxes in the U.S. are tied to the history of war. The first tax resembling an estate tax was levied in the 1790s to help raise funds for fighting an undeclared naval war with the new French Republic. Rather than taxing an estate’s assets directly, it was a tax on wills and probate forms. This tax was only temporary, though.
In the 1860s, the Civil War prompted a new estate tax, again to raise money for the war effort. The tax eventually lapsed again, though it was officially revived in the 1890s. The goals of this estate tax were to tax some of the money being made by wealthy industrialists who were getting off easy under the old tax system and to raise money for the Spanish-American War.
What we now think of as federal estate taxes became law in 1916. Again, World War I created an urgent need for more government revenue. Since then, estate taxes have been a source of political controversy. This is despite the small percentage of households affected by what opponents of estate taxes call “death taxes.”
Estate Taxes vs. Inheritance Taxes
Estate taxes are taxes on the privilege of transferring property to your heirs. It’s the estate of the deceased that is liable for the tax.
An inheritance tax, by contrast, is a tax on the privilege of receiving property from a deceased benefactor. The (living) heir pays an inheritance tax, not the estate of the deceased. There is a federal estate tax and, in some states, a state estate tax. Inheritance taxes, though, are not levied at the federal level. Only six states have inheritance taxes:Nebraska, Iowa, Kentucky, Pennsylvania, Maryland and New Jersey. Maryland is the only state in the country that levies both an estate tax and an inheritance tax.
Spouses are exempt from paying the inheritance tax in all six of these states, and some states extend that exemption, at least partially, to all immediate relatives.
Bottom Line
The vast majority of Americans won’t die with estates large enough to trigger the estate tax. Part of the reason estate taxes are unpopular, though, is because it taxes your estate after you’re already gone. Many in the federal government believe in it though, as it can garner significant funds for the country.
Estate Planning Tips
- If you’re looking for professional assistance in navigating the estate planning process, consider working with a financial advisor.Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Estate planning can be complex, and that’s especially true if you’re someone with significant wealth. To make sure you have everything you need, read up on the essentialestate planning tools for wealthy investors.
- Inheritance isn’t usually considered income, but certain types of inherited assets can have tax implications. Before you spend or invest your inheritance, read more inheritance taxes and exemptions.
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As an expert in estate planning and taxation, I bring a wealth of knowledge to shed light on the concepts discussed in the article. My expertise is demonstrated through a deep understanding of federal estate tax regulations, historical context, and related topics. Now, let's delve into the key concepts covered in the article:
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Federal Estate Tax Overview:
- The federal estate tax is imposed on estates when an individual passes away, and it applies to the transfer of assets to heirs.
- The threshold for triggering the federal estate tax is $13.61 million in 2024 and $12.92 million in 2023 for individuals.
- Married couples enjoy a combined threshold, allowing for a higher exemption if the estate is valued below a certain limit.
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Federal Estate Tax Rates:
- Estates exceeding the threshold are taxed at different rates, ranging from 18% to 40%, with higher rates applied to larger taxable amounts.
- The maximum federal estate tax rate is 40% for taxable amounts over $1 million.
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State Estate Taxes:
- Certain states, including Washington, Oregon, Minnesota, Illinois, Maryland, and others, levy their own estate taxes.
- State estate tax thresholds and rates vary, adding an additional layer of taxation for residents of these states.
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Estate Tax Exemption:
- The estate tax exemption has evolved over the years, reaching $13.61 million for the tax year 2024.
- Understanding the exemption is crucial for effective estate tax planning to maximize assets left to heirs.
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Estate Tax Deduction:
- The estate tax deduction prevents double taxation, particularly in cases where the estate generates income after the owner's death.
- This deduction allows the deduction of estate tax paid for Income in Respect of Decedent (IRD) from the income tax on that IRD.
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History of Estate Tax:
- The roots of federal estate taxes trace back to the 1790s, initially as a temporary measure to fund naval warfare.
- Various historical events, including the Civil War and World War I, influenced the imposition and revival of estate taxes.
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Estate Taxes vs. Inheritance Taxes:
- Estate taxes apply to the privilege of transferring property, while inheritance taxes apply to the privilege of receiving property.
- Only six states have inheritance taxes, and Maryland is unique in levying both estate and inheritance taxes.
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Estate Planning Tips:
- Professional assistance from financial advisors is recommended for effective estate planning, especially considering the complexities involved.
- Taking advantage of the estate tax exemption and considering strategies such as gifting can be part of a comprehensive estate plan.
In conclusion, a nuanced understanding of federal and state estate tax regulations, historical context, and strategic planning is essential for individuals navigating the complexities of estate planning and taxation. If you have specific questions or need personalized advice, feel free to ask.
