Before I tell you everything about estate taxes, know if your estate value is below $12.92 million. When the owner of an estate dies and leaves his assets to one or multiple heirs, the estate becomes taxable for inheritance and estate taxes.
The amount of tax depends upon the estate’s location in the US and how much the owner was worth. Although there is a possibility of someone getting charged with the estate tax, it is considerably low. The amount of worth subjected to the federal estate tax is immense. Most US households have a net worth lower than $10 million.
This article explains all you want to know about
What Are Estate Taxes?
Both the federal and state governments levies estate taxes. When someone leaves behind an estate after their death, the property remains under the obligation of tax payment. The heirs inheriting the property are supposed to pay inheritance tax.
The tax levied by the state and the federal government is assessed according to the asset’s fair market value. Therefore, irrespective of how much the deceased owner has paid for the estate, it is valued according to a fair market value; and also the location of the estate.
However, if the deceased has left anything to a surviving spouse, those are not subjected to any tax payment. However, if the estate crosses the exclusion limit and the surviving spouse dies, the estate’s beneficiaries become liable for the estate tax payment.
Types Of Estate Taxes
Both the federal government and the state government can levy an estate tax. As a result, there are two different types of estate taxes–
- Federal estate tax
- State estate tax
Federal Estate Tax
According to the IRS, estates with taxable gifts and combined gross assets exceeding $12.92 for 2023 are subject to federal estate tax. Also, the portion above the taxable limits is taxable at a 40% tax rate. However, the tax can be taken below that level by following different loopholes, deductions, and discounts.
State Estate Tax
Not all jurisdictions accept estate tax. However, if you live in a state that does accept state estate tax, then you are not likely to feel the amount as bothersome as the federal estate tax. Some jurisdictions that accept estate tax are –
⦿ District of Columbia.
⦿ New York
⦿ Rhode Island
⦿ Washington State
How does Estate Tax Work?
The limit of taxable amounts for estates changes throughout the years. In 2022, the limit was $12.06 million. Currently, that amount has exceeded $12.92 million. Now, if a deceased person has left $13 million in the estate, only an amount of $80000 remains under a tax obligation.
However, if there are assets transferred to a surviving spouse, it can potentially eliminate the estate tax. But if the surviving spouse dies, the beneficiaries inheriting the asset become liable to pay inheritance tax.
Even if any estate escapes federal estate tax payment, they may still be liable to pay state estate taxes. States where the individual was living at the time of their death charge the estate with the estate tax. However, no jurisdiction taxes any estate with an estimated value under $1,000,000.
Federal Estate Tax Rates
The US federal government has set up a tax rate based on the taxable amounts. The rate starts at 18% and may go up to 40%. Here is a list of the taxable amount and the rates at which the amount of the estate gets taxed –
|Tax rate||Taxable Amount|
|18%||$0 to $10,000|
|20%||$10,001 to $20,000|
|22%||$20,001 to $40,000|
|24%||$40,001 to $60,000|
|26%||$60,001 to $80,000|
|28%||$80,001 to $100,000|
|30%||$100,001 to $150,000|
|32%||$150,001 to $250,000|
|34%||$250,001 to $500,000|
|37%||$500,001 to $750,000|
|39%||$750,001 to $1,000,000|
|40%||$1,000,001 and up|
The first estate tax is paid on a taxable amount of $10000 at an 18% rate. The payable amount here is $1800. If the taxable amount exceeds 10000, the rest of the amount will be taxed at a 20% rate.
The exceeding taxable amount taxed at a 20% rate should be below $20000. Therefore, the payable federal estate tax amount will include $1800 ( tax for the first $10000 taxable amount at an 18% rate) and the exceeding taxable amount calculated at a 20% rate. The process will go on for the remaining taxable amount.
This means – even if your taxable amount exceeds $1,000,001, you will not have to pay at a 40% rate for the whole taxable amount.
Frequently Asked Questions: (FAQs):-
Here are some popular questions people usually ask about the estate tax. The answers might be helpful.
Ans: When a person dies, leaving an estate amounting to estate tax, the heirs become liable to pay an inheritance tax. However, the estate itself is liable for paying the real estate tax. The executors of the estate are responsible for calculating the taxable and the tax amount and levying it on the estate. They usually use form 706.
Ans: Here are different ways of avoiding estate tax –
⦿ Giving gifts to the family.
⦿ An invocable life insurance trust may help.
⦿ Tax may be avoided by making charitable donations.
⦿ Family limited partnerships also help avoid estate tax.
Ans: Real estate worth more than $12.92 million is subjected to estate tax levied by the federal government of the US. Amounts exceeding the said limit are subjected to changing tax rates starting from 18% and going up to 40%. The tax rate depends upon the taxable amount.
The chances of paying estate tax are really low since the number of US citizens with an estate value above $12.92 is a minority. Even the owners falling under that category can find different workarounds with the help of experts. However, surviving beneficiaries ( spouses) don’t have to pay any inheritance tax for the items transferred to them.
I hope that this article was helpful. However, if you need any additional help, please reach out to us. The comment box is yours for the taking.
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