Estate and inheritance taxes

PostedNovember 24, 2022

UpdatedJanuary 10, 2023

Byidfuiveirbuwoikwx

Summary

Estate and inheritance taxes are federal and state taxes on a person’s assets after they die. This article explains how the federal estate tax works and how much the federal estate tax exemption is. It then explains state estate and inheritance taxes.

What are estate and inheritance taxes?

Estate and inheritance taxes are federal and state taxes on a person’s assets after they die. Estate tax is sometimes called the “death tax.” It is mainly a federal tax, but 13 states do also have an estate tax. ¹ Estate taxes are paid by the estate before any assets are given out to the beneficiaries of the deceased person’s will.

Inheritance tax is a state tax only: there is no federal inheritance tax. Inheritance taxes are paid by the beneficiaries of the deceased person’s will after they receive their assets.

How does the federal estate tax work?

The federal estate tax is a tax on the total value of the assets in a person’s estate after they die and any estate debts (such as mortgages) have been paid.

The federal estate tax is officially called the Estate and Gift Tax, because it is joined to the federal Gift Tax. This means that when the IRS decides whether a deceased person’s estate needs to pay federal estate taxes, it looks at both the value of the person’s estate and the amount that the person gave in taxable gifts during their lifetime.

The federal Estate and Gift Tax is applied only when the combined value of the person’s estate plus the value of their taxable lifetime gifts is above a certain amount. If it is under that figure, it is exempt from federal estate tax.

How much is the federal estate tax exemption?

The amount that a deceased person’s estate and lifetime taxable gifts can be worth before their estate is taxed goes up every year.² In 2022, that combined amount was $12.06 million. In other words, if the estate plus lifetime taxable gifts comes to $12.06 million or more, the estate will need to pay federal taxes. If the combined total is less than that, it will not.

For example, if a deceased person’s estate was worth $7.5 million and they gave $3.5 million worth of taxable gifts during their lifetime, their estate would not need to pay federal estate taxes, because the combined total was only $11 million. This is under the exemption figure of $12.06 million.

However, if the person’s estate was worth $8 million at the time of their death and they gave $5 million in taxable gifts during their lifetime, the estate would need to pay federal taxes, because the combined amount comes to $13 million. If their estate was worth $12.05 million and they gave $0 in lifetime taxable gifts, they would not need to pay federal estate tax.

Only a very small proportion of U.S. citizens (about 0.1%) have estates valuable enough to be subject to federal estate taxes.³

How does state estate tax work?

Like federal estate tax, state estate tax is a tax on the total value of the assets in a person’s estate after they die and any estate debt has been paid. Unlike the federal estate tax, it is not tied to any other tax.

Only 12 states and the District of Columbia have an estate tax. However, their exemption figure (how much an estate can be worth before it gets taxed) is lower than the federal government’s, so more people’s estates have to pay state estate tax than federal estate tax.

For instance, in Massachusetts and Oregon, the exemption amount is only $1 million, meaning that if a deceased person’s estate is worth more than $1 million, it will need to pay state estate taxes. Other states have higher exemption amounts. For example, in New York an estate only gets taxed if it is worth over $6.1 million, and in Connecticut it needs to be worth over $9.1 million.⁴

What is an inheritance tax?

An inheritance tax is a tax that the beneficiaries of a deceased person’s will may have to pay on the assets that they inherit. As of 2022, only six states—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—have inheritance taxes.⁵ Maryland is the only state with both a state-level estate tax and an inheritance tax.

The inheritance tax is calculated using a number of factors. These include how much the person inherits and what their relationship was to the deceased person. For instance, no states require a person’s surviving spouse to pay inheritance taxes.⁶ In some states, children, other immediate family members, and charities are also exempt.

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