What Is the Federal Estate Tax?

Federal Estate Taxes Explained

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Definition

The federal estate tax is a tax on your right to transfer assets to your heirs and beneficiaries after your death. Assets that can be taxed include cash, stock, bonds, real estate, and other valuable assets.

How the Estate Tax Works

The total tax due is calculated by adding up the fair market values of all the decedent's (the person who died) assets as of their date of death. The assets that are part of your estate can include:

  • Cash
  • Stock, bonds, and other securities
  • Business interests
  • Real property
  • Trusts and annuities
  • Insurance
  • Other valuable assets

The total of all these assets is known as your "gross estate."

The fair market value of your assets is not necessarily what you paid for them. Instead, it's what they are worth at the time of your death. The executor or administrator of the estate can also elect to have everything valued on an alternate date six months later, provided the assets aren't "distributed, sold, exchanged, or otherwise disposed of within the six month period," the IRS notes.

Note

Using the six-month alternate valuation date can be beneficial if an estate is expected to lose value over six months, which would, in theory, lower the estate tax bill.

Credits and allowable estate tax deductions are subtracted from your gross estate. These can include property you pass to charity, mortgage or other debts, and any costs and fees incurred to settle your estate.

Only assets that are worth more than a certain threshold are taxed at a percentage of their value. This threshold is known as the "estate tax exemption." For 2022 (the tax return you file in 2023), the estate tax exemption is $12.06 million.

The rate at which your estate is taxed depends on how high over the exemption limit your assets are. The rate ranges from 18% for assets that up to $10,000 more than the exemption to 40% for estates that are $1 million or more above the exemption.

Who Is Subject to the Estate Tax?

The estates of all U.S. citizens and U.S. residents at the time of death are subject to the federal estate tax, but very few estates actually have to pay it because of the exemption. Only estates whose values exceed the exemption after deductions are made, and credits are taken, are subject to the federal estate tax on the balance.

History of the Estate Tax

The estate tax exemption was initially indexed for inflation under the provisions of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRUIRJCA). This law also set the top estate tax rate at 35%.

These provisions were supposed to remain in place until Dec. 31, 2012. At that point, the federal estate tax laws were supposed to revert back to the ones in effect before 2001. This meant that the federal estate tax exemption would drop all the way down to $1 million, and the tax rate would jump to 55% in 2013.

Then Congress and President Barrack Obama acted in the early days of 2013 to pass the American Taxpayer Relief Act (ATRA). This law made permanent the TRUIRJCA changes to the rules governing estate taxes, gift taxes, and generation-skipping transfer taxes.

In 2018, the Tax Cuts and Jobs Act (TCJA) more than doubled the 2017 exemption, which was already indexed to keep pace with inflation.

The Unlimited Marital Deduction

One of the most significant deductions for the estate of a married decedent is the unlimited marital deduction.

Remember, the estate tax is based on an estate's value after all available deductions and credits have whittled it down. In general, the marital deduction allows a decedent to take a deduction for all property in the gross estate transferred to the surviving spouse at death.

Note

Generally speaking, the IRS does not allow the marital deduction if the surviving spouse is not a U.S. citizen.

Estate Tax Portability

The Internal Revenue Code also provides for portability of the estate tax exemption between married couples. Portability means that if you are married and die before your spouse, you can pass any of your unused exemption to them to use for their own estate.

For example, if your father left an estate worth $10 million when he passed away in 2021, he still had $1.7 million left after applying the 2021 exemption of $11.7 million. If your father was married at the time of his death, he can pass that remaining $1.7 million from his estate to his spouse. Now your father's spouse can shelter $1.7 million more than whatever the estate tax exemption is at the time of their death.

A federal estate tax return must be filed if the executor of the estate wants to give the portability bump to the surviving spouse, even if the decedent's estate doesn't owe a tax because its value doesn't exceed the exemption amount. Submitting the form indicates that the portability option is being exercised; to opt out, the executor of your estate would have to check the box in Section A of Form 706.

How to File an Estate Tax Return

An estate must file a federal estate tax return, Form 706 when a gross estate exceeds the federal estate tax exemption for the year of the decedent's death.

Form 706 must be filed with the IRS within nine months of the decedent's date of death.

An automatic extension can be applied for by using Form 4768. Any tax amounts owed on the estate that aren't paid by the due date will accrue interest.

Estate Tax vs. Inheritance Tax

Estate and inheritance taxes are two separate things, but they're often confused. They are often lumped together under the unfortunate name "death taxes."

The estate tax is based on the value of a decedent's entire estate after deductions, credits, and the estate tax exemption is subtracted and applied. It's payable by the estate.

An inheritance tax is payable by the beneficiary who receives property from the estate. It's based on only the value of those inherited assets. It would apply if you inherit property, even if the estate were large enough to qualify for a federal estate tax. If you are the beneficiary, you are responsible for paying any inheritance tax. Some people include provisions in their wills to have the estate take care of this burden for their heirs.

The federal government doesn't impose an inheritance tax, but six states do as of 2020: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

  • Only the part of your estate that is over the federal exemption is taxed. In 2022, that exemption limit is $12.06 million.
  • Estate tax rates range from 18% to 40%.
  • In most cases, your estate isn't subject to tax if it's inherited by a spouse.
  • An estate tax is paid by the estate on assets over a certain amount; an inheritance tax is paid by the beneficiary on certain inherited assets.

Frequently Asked Questions

Is there an estate tax at the state level?

Twelve states have an estate tax: Washington, Oregon, Hawaii, Minnesota, Illinois, Vermont, Maine, Connecticut, Massachusetts, Rhode Island, New York, and Maryland. The District of Columbia also imposes an estate tax.

How can I reduce estate taxes?

Giving away assets before your death reduces the size of your estate's tax burden, as long as you care careful about federal gift tax rules. You can also leave bequests to charity. If you leave your estate to your spouse, you can avoid estate taxes.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Estate Tax."

  2. IRS. “Instructions for Form 706,” Pages 10-11.

  3. IRS. “Instructions for Form 706,” Page 5.

  4. IRS. “Estate Tax.”

  5. IRS. “Instructions for Form 4768,” Page 2.

  6. Congress.gov. “H.R.4853 - Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.”

  7. Congressional Research Service. "The Impact of the Federal Estate Tax on State Estate Taxes," See "Summary" section.

  8. Congress.gov. “The Impact of the Federal Estate Tax on State Estate Taxes,” Page 3.

  9. Congress.gov “H.R.8 - American Taxpayer Relief Act of 2012,” Pages 126 STAT. 2315-2318.

  10. IRS. “What's New - Estate and Gift Tax.”

  11. IRS. “Frequently Asked Questions on Estate Taxes.”

  12. IRS. "Instructions for Form 706," Page 35.

  13. IRS. "Instructions for Form 706," Page 17.

  14. IRS. "Form 706: United State sEstate (and Generation-Skipping Transfer) Tax Return," Page 4.

  15. IRS. “Instructions for Form 706,” Pages 2, 17-19.

  16. IRS. “Instructions for Form 706,” Pages 2-3.

  17. Tax Foundation. “Does Your State Have an Estate or Inheritance Tax?

  18. Northwestern Mutual. "Pros and Cons of Gifting an Estate Before Death."

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