What is Estate Tax?
All property, no matter the form of ownership, (and certain powers) that a person has at the time of his/her death is subject to the federal estate tax.
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 months after death.
Estate Tax Exclusions
Although most of a decedent's assets are included in the gross estate, there are some exclusions. If a person leaves all of their property outright to a spouse, there is no federal estate tax liability. This is known as a marital deduction.
If a person leaves property to a tax-exempt charity, there is no tax.
Several other smaller expenses are deductible, such as probate administration costs, debts on the property, and funeral expenses.
Who Pays Estate Taxes?
The majority of Americans will never have to pay federal estate taxes. In fact, this tax only affects the wealthiest two percent of Americans.
Under the Tax Cut and Jobs Act, the basic exclusion amount for an estate tax return for a 2018 date of death increased to $10 million, before taking into account the necessary inflation adjustment. For deaths occurring in 2019, the federal estate tax exemption is $11.4 million, per person (or $22.8 million per couple). Once you exceed that exempt amount, a hefty 40% tax is applied. In 2026, the amounts revert back to the 2017 exemption -- $5.4 million per individual, and $11.2 million per married couple. (The basic exclusion amount increases each year to adjust for inflation.)
How to Calculate and 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 can 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 by filing Form 4768.
State Estate Taxes
While an estate may not owe federal estate tax, probably due to the generous personal exemption amount, there are twelve states and the District of Columbia (matches indexed federal exemption amounts) that impose their own estate taxes.
As of 2019, the twelve states include: Rhode Island, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Illinois, Vermont, Washington, Connecticut, and Hawaii.