Not many people pay estate taxes. With rates up to 40 percent in the U.S., estate taxes can be pricey. Due to exclusion, exemptions, and loopholes, estate taxes are hardly ever levied.
“About 4,100 estate tax returns will be filed for people who die in 2020, of which only about 1,900 will be taxable—less than 0.1 percent of the 2.8 million people expected to die in that year,” according to the Tax Policy Center.
So, what are estate taxes and who pays them? You need to know the tax code in your state because some states charge their own estate tax, inheritance tax, or both.
Who pays estate tax?
An estate tax is “a tax on property (cash, real estate, stock, or other assets) transferred from deceased persons to their heirs,” according to the Center on Budget and Policy Priorities (CBPP).
The good news for most beneficiaries is that in 2020 the federal estate tax only applies to estates worth $11.58 million or more. The exclusion limit was just $1.5 million in 2004. The inclusion limit more than doubled between 2017 and 2018 because of the Tax Cuts and Jobs Act of 2017. “A filing is required for estates with combined gross assets and prior taxable gifts exceeding … $5,490,000 in 2017, $11,180,000 in 2018, $11,400,000 in 2019, and $11,580,000 in 2020,” according to the IRS.
Surviving spouses are usually exempt from estate taxes because of the unlimited marital deduction, according to Investopedia. After a spouse dies, the beneficiaries of the estate might face estate tax.
As the CBPP pointed out, other estates manage to avoid estate taxes. The CBPP said, “Many wealthy estates employ teams of lawyers and accountants to develop and exploit loopholes in the estate tax that allow them to pass on large portions of their estates tax-free. These strategies don’t benefit the broader economy; they only allow the wealthiest estates to avoid taxes.”
How does estate tax work?
Federal and state estate tax is based on the fair market value of the estate’s includible property. The value might be higher or lower than the amount the decedent originally paid.
“The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets,” the IRS stipulates. “Certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your ‘Taxable Estate.’ These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses, and qualified charities.”
Is estate tax federal or state?
All Americans face federal estate tax for estates above the qualifying threshold. However, only some states have an estate tax or inheritance tax. The tax is assessed against certain individuals who receive the inheritance from estates above a certain exclusion limit depending on the individuals’ relationship to the decedent.
The exclusion limit is lower for state estate taxes and inheritance taxes and sometimes as low as $1 million, as Investopedia pointed out.
Connecticut, the District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington all charge estate tax. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania all charge inheritance tax. Maryland appears on both lists.