Estate tax: What is it and who pays it?

What is the estate tax?

According to the IRS, the estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own, or have certain interests in, at the date of death.

Who pays the estate tax?

The government charges the federal estate taxes on the value of what you inherit. You must pay federal and state estate taxes from the assets of the estate, before the remaining assets can be distributed to you as an heir or to your heirs.

The executor or the trustee (or the designated beneficiary) of a qualified grantor trust handles filing the applicable federal and state estate tax returns and ensuring that all taxes are paid from the estate.

Estate tax exemptions

The estate tax exemption amount changes every year. The federal estate tax exemption amount for 2023 is $12.92 million per individual ($25.84 per married couple). You would also want to find out if your state also has an estate tax, or if you’re in one of the few states with an inheritance tax. We look at this at the end of the article.

How does the gift tax work with the estate tax?

It’s crucial to note that estate and gift taxes are often considered together, because they are subject to the same tax rate and share the lifetime exemption amount.

However, one main difference is that the estate tax applies to transfers of the decedent’s property at death, while the gift tax applies to transfers made while still living. It’s critical to check what the limit is for every year, because it changes.

Calculating estate taxes rates

Many people think that the estate tax is 40% on any taxable amount, but that’s not the case. For most of the federal estate tax tiers, you’ll pay a base tax plus a marginal rate. Current federal estate taxes max out at 40% for taxable amounts greater than $1 million.

Taking a step back, the estate tax is a tax on your right to transfer property at your death or the death of someone who would leave you an estate. The process consists of an accounting of everything a person owns or have certain interests in at the date of death. It can be complex, so you may want to work with a team of professionals among others, to ensure that you’re accounting for everything.

Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. You’d have to file an estate tax return if the gross estate of the decedent, increased by the decedent’s adjusted taxable gifts and specific gift tax exemption, is valued at more than the filing threshold for the year of the decedent’s death, which changes.

Estate tax thresholds and rates

As mentioned above, the federal estate tax generally applies to assets over $12.92 million ($25.84 million for married couples) in 2023, and the estate tax rate ranges from 18% to 40%. Below, we go into more detail on the threshold levels.

Estate tax rates for 2023

Source: Internal Revenue Service

Reporting estate taxes

An estate administrator must file the final tax return for a deceased person separate from their estate income tax return. The estate may owe income tax on income generated by assets of the deceased.

If the estate generates more than $600 in annual gross income, you must file Form 1041, U.S. Income Tax Return for Estates and Trusts. An estate may also need to pay quarterly estimated taxes.

Put simply, when someone dies, their assets become property of their estate. Any income the assets generate becomes part of the estate and may require you to file an estate income tax return. Some examples of income producing assets:

• Certificates of deposit (CDs)
• Bonds
• Mutual funds
• Rental property
• Savings accounts
• Stocks

Before you file an estate income tax return, you need a tax identification number for the estate. You can apply for this number online, by fax or by mail. A Tax Pro can help you navigate the system.

How much can you inherit from your parents without paying taxes?

There is no federal inheritance tax, but there is a federal estate tax. The federal estate tax generally applies to assets over $12.92 million ($25.84 million as a married couple) in 2023, and the estate tax rate ranges from 18% to 40%. Some states also have estate taxes, and they might have much lower exemption thresholds than the IRS.

What’s the difference between the inheritance tax and estate tax?

First, people often think estate and inheritance taxes are interchangeable, but there’s a distinction. 

It’s important to note that the U.S. does not have a federal inheritance tax and only 6 states in 2023 have one. The U.S. does have a federal estate tax, and some states have their own estate taxes.

In the states that have an inheritance tax, it is levied on assets inherited from someone who died. The person who inherits the assets pays the tax, and rates can vary based on the inheritance's size, and the inheritor's relationship to deceased.

States that currently impose an inheritance tax include:

• Iowa (Please note that Iowa is phasing out its inheritance tax, which was repealed in 2021; for deaths in 2020-2024, some inheritors will still have to pay a reduced inheritance tax.)
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

If you’re in one of these states, inheritance tax returns and tax bills are typically due within several months of the descendant's death.

Always work with a trusted team of professionals, as there are a lot of nuances to these rules. This is all very complex and happens at a time when people are grieving, so you’d want to work with professionals to make sure that you’re accounting for everything properly.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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