Estate Tax Exemption: How Much It Is and How to Calculate It

You may have heard about the so-called “death tax” on the transfer of assets after death. The federal government and some states levy estate taxes upon a person’s death, but only if the value of their assets meets a minimum threshold, known as the estate tax exemption. With this exemption in place, the estate tax at the federal level impacts only a small number of people, while state estate taxes usually affect more people. Knowing more about the estate tax exemption and the tax liability where you live can help you plan your estate accordingly.

Key Takeaways:

• The Internal Revenue Service levies a federal estate tax on estates exceeding the exemption.
• In 2023, the federal estate tax exemption is $12.92 million, affecting a limited number of people in the country.
• Twelve states and the District of Columbia levy their own estate taxes, and most states have a lower threshold than the federal exemption.
• A handful of states also have an inheritance tax, which differs from an estate tax because a beneficiary pays it rather than the estate.
• It’s helpful to speak with a tax accountant or a legal professional who can advise you on ways to reduce or eliminate the tax liability on your estate.

What Is an Estate Tax?

An Estate Tax is a tax on the transfer of an estate after a person’s death. A person’s estate includes property and other assets they own or have interests in at the date of their death. The value of those assets, known as the gross estate, is based on the fair market value of items, not on how much they were when the decedent purchased or acquired them. If the gross estate exceeds a specific amount, the IRS imposes a tax on the estate before it can transfer to a beneficiary.

Who Pays Estate Taxes in 2023?

In reality, very few people pay estate taxes. That’s because the federal estate tax exemption excludes estates under a certain taxable amount from filing returns. In 2023, that exemption is $12.92 million. This exemption is per person, so it doubles for married couples. In 2023, the exemption for a married couple is $25.84 million.

In 2017, the Tax Cuts and Jobs Act doubled the estate tax exemption, and it has continued to increase each year since then to account for inflation. As a result, fewer estates have paid this tax in recent years. When the legislation took effect, the Center on Budget and Policy Priorities estimated that only two of every 1,000 estates would owe federal estate taxes. Remember that if you have a corporation, you need to make sure you are in compliance with the Cooperate Transparency Act.

How To Calculate the Estate Tax

If you’re planning your estate, you should know about your tax liability. Knowing whether your estate exceeds the tax exemption can help you prepare your loved ones or take proactive steps to minimize this tax liability. Here are the steps you can take to calculate the federal estate tax:

Determine Your Gross Estate

Start by determining the total value of your assets or your gross estate. Consider everything you own, including real estate, cash, stocks, life insurance, business interests, and other items such as jewelry or artwork.

Subtract Deductions

The IRS allows you to subtract certain deductions from the gross estate to determine the net amount or the taxable estate. These deductions often include mortgages, debts such as personal loans, and administrative expenses. The administrative expenses you can deduct are usually costs related to the estate, which may include attorney fees, appraisal fees, or insurance. Subtract the total amount of those deductions from your gross estate.

Consider Charitable Deductions or Transfers to a Spouse

When calculating your taxable estate, you can subtract charitable deductions and assets that transfer to a surviving spouse. A charitable deduction may include gifts in a charitable trust. A marital deduction allows you to transfer assets to your spouse before or after death without being subject to a tax. Consider these additional deductions and subtract them from the gross estate, along with your other deductions.

Find Your Tax Liability 

When you’ve completed the above steps, you’ve calculated your net estate. Subtract the federal estate tax exemption from that number to determine your taxable estate. Once you know the taxable estate, find your tax liability. The IRS taxes estates up to 40% based on tiers. Most federal estate tax tiers include a base tax plus a taxable amount. Here are the federal tax rates for estates above the $12.92 threshold in 2023:

• $0 to $10,000: 18%.
• $10,001 to $20,000: $1,800 base tax plus 20%.
• $20,001 to $40,000: $3,800 base tax plus 22%.
• $40,001 to $60,000: $8,200 base tax plus 24%.
• $60,001 to $80,000: $13,000 base tax plus 26%.
• $80,001 to $100,000: $18,200 base tax plus 28%.
• $100,001 to $150,000: $23,000 base tax plus 30%.
• $150,001 to $250,000: $38,800 base tax plus 32%.
• $250,001 to $500,000: $70,800 base tax plus 34%.
• $500,001 to $750,000: $155,800 base tax plus 37%.
• $750,001 to $1 million: $248,300 base tax plus 39%.
• Over $1 million: $345,800 base tax plus 40%.

What To Know About State Estate Taxes

While your property may not exceed the threshold for the federal estate tax, it’s more likely you will owe state estate taxes if you live in a state or jurisdiction that imposes them. Currently, 12 states and the District of Columbia levy estate taxes based on the decedent’s residence at the time of their death. States set their own minimum thresholds for estate taxes, and some have exemptions as low as $1 million, according to the Tax Foundation. Here are the states and districts that levy estate taxes and their exemptions:

• Connecticut: $12.92 million.
• District of Columbia: $4.594 million.
• Hawaii: $5.49 million.
• Illinois: $4 million.
• Maine: $6.41 million.
• Maryland: $5 million.
• Massachusetts: $1 million.
• Minnesota: $3 million.
• New York: $6.58 million.
• Oregon: $1 million.
• Rhode Island: $1,733,264.
• Vermont: $5 million.
• Washington: $2.193 million.

Estate Tax vs. Inheritance Tax

Some people use the term “death tax” when referencing estate and inheritance taxes, but they’re different taxes. While an estate tax is levied on the whole estate, an inheritance tax is paid by the beneficiary receiving the assets. It’s assessed based on the amount of assets a beneficiary receives. There’s no federal inheritance tax, but some states impose this tax. Maryland is the only state with an estate tax and an inheritance tax. Here are the states that levy inheritance taxes:

• Iowa.
• Kentucky.
• Maryland.
• New Jersey.
• Nebraska.
• Pennsylvania.

How To Reduce or Avoid Estate Taxes

During your lifetime, there are ways you can work to minimize or avoid taxes on your estate after your death. Taking these proactive steps can reduce the burden your loved ones may face during an already difficult time. Here are some ways to minimize the tax liability on your estate:

Gift Your Assets

You can choose to gift some of your assets to others to decrease the value of your estate. Be aware that the IRS also has an exemption for gifts. In 2023, the exemption is $17,000. That means you may be subject to a gift tax if your gifts exceed this amount.

Make Charitable Donations

Consider making charitable donations that you can deduct from your gross estate. In some cases, you might be limited in how much you can give. You may be able to create a charitable trust to donate more.

Set Up an Irrevocable Trust

Some people choose to move their assets into irrevocable trusts. Those assets then belong to the trust rather than you. An irrevocable trust can protect your assets from federal and state estate taxes. You may also want to learn about Asset Protection and how the Corperate Transparency Act impacts you.

Relocate to a New State

If your assets don’t exceed the federal tax exemption but you’re concerned about state taxes, consider relocating. Most states don’t impose their own estate taxes.

Plan Your Estate Now

While most people won’t owe a federal estate tax on their property, it’s important to consider this assessment if your assets exceed the tax exemption. In addition, if you live in a state with an estate tax, there are ways you can work to lower your tax liability before your death. Since estate planning can be complex, it’s best to work with a tax or legal professional who can guide you through this process.

At Anderson Advisors, we provide personalized consultations to understand your situation. Working with our experienced advisors, you can craft an estate plan to protect your assets and relieve your loved ones of additional stress after you’re gone. Contact us today to schedule your strategy session.