What Is the Federal Estate Tax?

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 Congressional Budget Office, in recent years, only about 0.2% of estates are subject to the federal estate tax.

That figure isn’t all that surprising considering that for 2022, the federal estate and gift tax exemption amount is $12.06 million ($12.92 million for 2023). This means that if the value of your estate and prior taxable gifts is $12.06 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 2022 tax year, estates with “combined gross assets and prior taxable gifts” of more than $12.06 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. 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?

The top estate tax rate is 40%, but this is not levied on your entire estate value. The tax only applies to the amount that is above the federal exemption. (See IRS Form 706 for the full tax rate schedule.)

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 2022, 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.