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Marcus Explains: The Federal Estate Tax

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The federal estate tax, also known as the “death tax,” is a tax on the transfer of your estate after your death. But the tax actually impacts only a small number of US taxpayers. According to the Tax Policy Center, generally, less than 0.1% of the estates (of those who have passed) are subject to the federal estate tax. 

That figure isn’t all that surprising considering that for 2020, the federal estate and gift tax exemption amount is $11.58 million. This means that if the value of your estate and prior taxable gifts is $11.58 million or less, it is exempt from the tax. 

Chances are if you’re subject to an estate tax, you’ve probably got a team of professionals helping you to navigate it. But even if your estate is relatively modest, it’s still a good idea to get a basic understanding of how the estate tax works. 

It’s an important consideration in estate planning, and your estate might not always be exempt since the rules could be changed by Congress at any time.  

What is the federal estate tax?

The federal government may tax the transfer of your estate after your death if it exceeds a certain value. But what does the IRS include in your estate? Think: cash, securities, real estate property, trusts, annuities, business interests and other assets. 

The IRS uses the fair market value of these items to calculate the gross total of your estate (or “gross estate”). The fair market value is the price you’d be able to fetch for an item if you were to sell it on the open market.  

Who has to pay the federal estate tax?

The estates of any US citizen and resident are all fair game. But given the high federal exemption amount, not many estates would actually have to pay the tax.  

For the 2020 tax year, estates with “combined gross assets and prior taxable gifts” of more than $11.58 million would need to file an estate tax return (Form 706). 

How does the IRS calculate the value of an estate?

First, the IRS uses the fair market value of an estate’s assets to determine your “gross estate,” which is just IRS-speak for the total dollar value of your assets. 

Next, the executor of the estate may be able to claim certain deductions to help lower the overall “taxable estate” (taxable estate = gross estate - deductions).

These deductions may include mortgages, other debts and estate administration expenses. And typically, if you’re passing the estate to your spouse, they may also be able to claim the marital deduction. 

Finally, your estate tax calculation includes any taxable gifts you made in your lifetime, if applicable. 

As you could probably tell, calculating the estate tax can get pretty complicated. But while we cannot cover it all in a paragraph or two, the IRS does provide more detailed instructions on the calculations and deductions in Form 706. This is not a light reading, so if you have any questions about what all is included in your estate value, don’t be shy about consulting with an estate planner or a tax professional.   

What is the top federal estate tax rate?

For 2020, the top estate tax rate is 40%, but this is not levied on your entire estate value. The tax rate only applies to the amount that is above the federal exemption.

Here’s a basic example for the 2020 tax year: If the value of the estate is $12.58 million, $11.58 million would be exempt. Only the $1 million that’s over the exemption amount would be taxed. 

What about state estate taxes?

Even if your estate is exempt at the federal level, it could still face estate taxes at the state level. As of 2019, these 12 states and the District of Columbia impose their own estate taxes:

  • Connecticut
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington State

Each state structures its estate tax differently with varying exemption amounts, but in most cases, the state exemption is lower than the federal amount. For more information, contact your state tax agency.

This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.