10 Facts You Should Know About the Federal Estate Tax

Your family’s financial security is important, so learning how the federal estate tax can affect your beneficiaries is vital. After your death, the state and the Internal Revenue Service may impose a death tax or estate tax on your assets, such as your real estate or annuity interest. It’s important to understand your state’s specific requirements and how the national laws can affect your finances. In this guide, we present 10 facts you should know about the federal estate tax so you can take proactive steps in your financial planning.

Key Takeaways:

• According to the Tax Cuts and Jobs Act of 2017, the federal estate tax applies to estates valued at $12.92 million in 2023. This threshold doubles to $25.84 million for married couples.
• On Jan. 1, 2026, the current taxable threshold will return to where it was before the TCJA.
• The federal tax may not be the only one you pay. Several states and the District of Columbia levy an estate tax in addition to the federal one. Some states impose an inheritance tax rather than an estate tax.
• The federal estate tax rate ranges from 18% to 40%, depending on the taxable amount over the threshold.
• The IRS decides how much your estate assets are worth using fair market value. The assets included in your gross estate are cash, securities, stocks, bonds, real estate, living trusts, and other property of monetary value.

What Is the Federal Estate Tax?

The federal estate tax applies to the transfer of your assets after your death. Since the early 20th century, when the estate tax began, the amount that’s exempt from the tax has continually increased. In 2017, the TCJA increased the amount to over $11 million. In 2023, the exemption caps at $12.92 million, but in 2026, it will return to the pre-2018 amount of about $5 million with adjustments for inflation.

10 Facts To Know About the Federal Estate Tax

The federal estate tax has specific implications and varying requirements, depending on the value of your assets at the time of your death. Here’s what you should know about the tax before beginning your estate planning.

Estate Taxes Only Apply if the Estate Is Worth More Than the Threshold

The federal estate tax applies to estates valued at $12.92 million or more in 2023, which means any estate worth less is exempt. This threshold jumps to $25.84 million for married couples.

Not All Estates Are Subject to Federal Estate Taxes

Since the law only impacts estates valued at $12.92 million or more, an estate worth less than that is not subject to federal estate taxes. Even if your estate is worth $12.5 million when you die, it’s exempt from the federal estate tax.

The Average Rate Paid for Estate Taxes Is 18%

The federal estate tax rate ranges from 18% to 40%, depending on the amount of your assets that exceed the threshold. If your estate is valued over $12.92 million during the 2023 tax year, only the amount that surpasses the threshold will be subject to the tax. For example, if your estate is worth between $1 and $10,000 more than the threshold, a tax rate of 18% applies. The following list details the 2023 federal estate tax rates:

• $1 to $10,000: 18% of the taxable amount.
• $10,001 to $20,000: 20% of the taxable amount.
• $20,001 to $40,000: 22% of the taxable amount.
• $40,001 to 60,000: 24% of the taxable amount.
• $60,001 to $80,000: 26% of the taxable amount.
• $80,001 to $100,000: 28% of the taxable amount.
• $100,001 to $150,000: 30% of the taxable amount.
• $150,001 to $250,000: 32% of the taxable amount.
• $250,001 to $500,000: 34% of the taxable amount.
• $500,001 to $750,000: 37% of the taxable amount.
• $750,001 to $1 million: 39% of the taxable amount.
• Higher than $1 million: 40% of the taxable amount.

Asset Transfers to Surviving Spouses Are Exempt From the Estate Tax

The marital deduction is unlimited if your surviving spouse is a U.S. citizen. If your estate transfers directly to them after your death, it isn’t subject to the federal estate tax. Surviving non-citizen spouses are allowed a marital deduction of $175,000 for 2023.

Some States Also Have Estate Taxes

The federal estate tax is not the only one. Depending on your state, other taxes may also apply upon your death. Some states impose their own estate taxes with their own thresholds and requirements; others may levy an inheritance tax. Maryland imposes both types of taxes. The following locations levy estate taxes but not inheritance taxes:

• Washington, D.C.
• Connecticut.
• Hawaii.
• Illinois.
• Maine.
• Massachusetts.
• Minnesota.
• New York.
• Oregon.
• Rhode Island.
• Vermont.
• Washington.

Gift Tax Exemptions Exist

Each year, the IRS sets an amount you can give an individual as a gift without paying the federal gift tax, which may affect your estate planning process. Generally, a gift is any property transferred to another person for less than it’s worth. The gift tax uses the total value you give away to an individual within a calendar year to decide how much you owe. Additionally, the IRS sets a lifetime gift exclusion amount. The executor of your estate will want to determine whether your lifetime gift amount exceeds the exclusion. If it does, the estate will pay taxes.

On Jan. 1, 2026, the Federal Estate Tax Threshold Will Return to Pre-TCJA Amounts

It’s important to remember that the current federal estate tax threshold exists only until Dec. 31, 2025. After this date, the threshold will return to the pre-2018 amount with adjustments for inflation, which could mean an estate worth an estimated $6.8 million could be subject to estate taxes.

Estate Taxes Differ From Inheritance Taxes

The federal estate tax applies to your estate’s value at the time of your death. In contrast, an inheritance tax applies to the amount your beneficiary receives from you, meaning the beneficiary will pay an inheritance tax, and the estate will pay the estate taxes. Like the federal estate tax, an inheritance tax typically applies to inherited assets valued over a certain threshold, depending on the state.

The Estate Pays on Its Behalf

Your estate pays the estate taxes when the executor files an estate tax return. The IRS uses this information to tax a percentage of the estate’s assets when its value exceeds the threshold for the year of your death. 

The Largest Estates Often Include Unrealized Capital Gains

When assets such as stocks, bonds, and real estate appreciate, they add value to your total estate. These capital gains are taxable when you realize or receive profits, often when you sell the asset. If you continue to hold onto it, it may never be subject to income tax. In many cases, the largest estates have unrealized capital gains. Any unrealized gains that are part of an estate at the time of death have usually remained untaxed since their creation.

Which Assets Are Subject to Federal Estate Tax?

The IRS accounts for everything you own or have interests in as of the date of your death. It determines the value of these assets using their fair market value. The total value of these assets makes up your gross estate. It includes assets such as cash and securities, trusts, business interests, annuities, and insurance. Other examples of assets that can be subject to the federal estate tax include:

• Stocks and bonds.
• A 401(k) or other retirement fund.
• Personal assets, such as a vehicle, home furnishings, or clothing.

Tax-Proof Your Estate

A professional can help you find any deductions to reduce or avoid paying federal estate taxes. The marital deduction is often key if your surviving spouse is a U.S. citizen since all property in your gross estate can pass directly to them. In many cases, estates passing to surviving spouses are exempt from the tax. Other deductions that can help you reduce or avoid the federal estate tax include the charitable donation deduction, mortgages, debts, planning and administration expenses, and losses during estate administration. Do forget about the Corporate Transparency Act that impacts all Trusts

Don’t let the future catch you off-guard. At Anderson Advisors, we help clients like you prepare for their future with diverse financial solutions, including annuities. Contact us today to learn more about securing your estate.