All property, no matter the form of owenership, (and certain powers) that a person has at the time of his/her death is subject to the federal estate tax. You've heard the saying that, "the only thing certain in life is death and taxes," - well, it's not certain but if it wasn't taken away from you by tax during your life it can be taxed at your death and taken from your estate. The estate tax is payable by your estate - it is usually paid by the estate of the decedent before property is distributed to the beneficiaries of the estate. Barring an extension, the estate tax is due within nine (9) months after your death.
Estate Tax Exclusions
Although just about all of a decedents’ assets are included in the Gross Estate, there are some exclusions. If you leave all your property outright to your spouse, there is no federal estate tax liability. Called the marital deduction, it is allowed for property left US citizen spouse. If you leave property to a tax-exempt charity, there is no tax. Several other smaller exepnses are deductible, such as probate administration costs, debts on the property, and funeral expenses.
Estate Taxes and Who Pays
The majority of Americans will never have to pay federal estate taxes. In fact, this tax only affects the wealthiest two percent of Americans.
For 2012, the personal estate tax exemption is raised to $5,120,000. For 2011, the threshold was $5 million, with a top tax rate of 35%.
Calculating Estate Taxes and How to File
Calculating federal estate tax can be complicated, so it is advisable to contact a tax professional or estate tax attorney for help. An estate planning attorney will help walk you through the process, inform you about any new laws, and complete the filing for you. However, if you prefer to contact an attorney later and in the meantime, would like to get an idea of what you might owe, there are a number of online estate tax calculators that can give you a good idea of what to expect. To calculate estate taxes using an online calculator, you’ll need as much information as possible about cash and investment accounts, retirement accounts, life insurance proceeds, vested stock options, the value of your home, vehicles, and other assets, your liabilities, charitable bequests, unused federal estate tax exemptions, and taxable gifts.
If you decide to file on your own, the IRS form you use is IRS Form 706. When preparing the return, keep in mind that you are filing for an estate that has a gross (not net) value beyond the estate tax exemption amount. The estate tax return is due nine months after the date of death. If you need more time, you can pay the estimated tax before the due date and file for a six-month extension—if requested before the due date. For help in filing, read IRS Publication 950.
State Estate Taxes
While your estate may not owe federal estate tax, probably due to the generous personal exemption amount, there are sixteen states and the District of Columbia that impose their own estate taxes and you don’t have to be rich to owe. The sixteen states include Ohio, New Jersey, Rhode Island, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Illinois, Vermont, Washington, Connecticut, Delaware, Hawaii, and North Carolina. If you are concerned that the amount of property you leave will exceed the threshold of your state, it might be a good time to consult with a financial planning professional to see if the state tax bite can be reduced.
Changes to Estate Taxes Since 2001
For many years the federal exemption amount was $600,000. Congress in 2001, made a number of changes to the estate tax. It gradually raised over the years the exemption amount to $3.5 million in 2009, with a tax rate of 45%. The estate tax was repealed in 2010, so that anyone who died in 2010 did not owe any federal estate tax. But in 2011, the estate tax was brought back to a $5 million individual exemption, with a 35% tax rate. In 2012, new dollar amounts increased the basic exclusion to $5,120,000. The 5 percent surtax that applied to estates over $10 million was repealed in 2002.