The Estate Tax is a tax on your right to transfer property at your death. Depending on the value of your Taxable Estate, the property that you hold at death may be subject to federal or state estate tax.
In this article, we explore the federal estate tax. If you want to learn more about state estate taxes, we wrote about the states that have estate and inheritance taxes in a different post.
Who Pays the Federal Estate Tax?
Most relatively modest estates do not require the filing of an estate tax return. Only estates with combined Gross Estate values in excess of the federal exemption threshold, also known as the Basic Exclusion Amount or BEA, require the filing of a Form 706 estate tax return, and those estates only pay on the value by which their Taxable Estates exceed the federal threshold.
What is the Federal Estate Tax Exemption Threshold?
The Federal Estate Exemption Threshold is the taxable value above which an estate is taxed. The estate tax threshold doubled through the Tax Cuts and Jobs Act under then-President Donald Trump to $11.18 million in 2018 and is scheduled to increase with the inflation rate through 2025. On January 1, 2026, the exemption threshold is set to return to what it was before 2018, $5.6 million, unless Congress extends or boosts the exemptions.
The estate tax exemption threshold for 2022 is $12,060,000 (IRS Revenue Procedure 2021-45).
| Year | Federal Tax Exemption Threshold |
|---|---|
| 2018 | $11,180,000 |
| 2019 | $11,400,000 |
| 2020 | $11,580,000 |
| 2021 | $11,700,000 |
| 2022 | $12,060,000 |
| ... | |
| 2026 | $5,490,000 + inflation (2017-2026) |
What is the Federal Estate Tax Rate?
Contrary to popular misconception, the federal estate tax rate is not a flat 40% tax rate. Similar to income tax rates, the federal estate tax rate is a progressive tax with a base tax amount and marginal rates that increases based on a Unified Rate Schedule managed by the IRS. The rate starts at 18% and increases progressively to 40% for taxable amounts over $1 million.
| Taxable Amount Over Column A |
Taxable Amount Not Over Column B |
Base Tax Amount Column C |
Tax Rate on Excess Over Column A Column D |
|---|---|---|---|
| $0 | $10,000 | $0 | 18% |
| $10,000 | $20,000 | $1,800 | 20% |
| $20,000 | $40,000 | $3,800 | 22% |
| $40,000 | $60,000 | $8,200 | 24% |
| $60,000 | $80,000 | $13,000 | 26% |
| $80,000 | $100,000 | $18,200 | 28% |
| $100,000 | $150,000 | $23,800 | 30% |
| $150,000 | $250,000 | $38,800 | 32% |
| $250,000 | $500,000 | $70,800 | 34% |
| $500,000 | $750,000 | $155,800 | 37% |
| $750,000 | $1,000,000 | $248,300 | 39% |
| $1,000,000 | --- | $345,800 | 40% |
Pairing the Federal Estate Tax Exemption threshold with the Unified Rate Schedule, we see that a Taxable Estate of $15,000,000 would, notwithstanding any other adjustments, pay $1,121,800 of federal estate tax in 2022. Here's how it works:
- Determine value subject to estate tax by taking the difference between $15,000,000 and the $12,060,000 exemption threshold for 2022 ($2,940,000)
- Match the amount subject to tax to the correct row on the Unified Rate Schedule
- Find the difference between the amount subject to tax and the matching lower bound amount in Column A ($2,940,000 - $1,000,000 = $1,940,000)
- The sum of the matching base tax amount ($345,800) and the variable tax amount (40% * $1,940,000) is the total federal estate tax due ($1,121,800).
Decreasing Your Taxable Estate
If you are concerned that you will exceed your state or federal tax exemption threshold, you may wish to speak with an accountant or financial advisor to explore whether one or more common estate tax minimizing strategies may be appropriate for you.
