As the old saying goes, nothing in life is guaranteed except death and taxes. And because estate taxes combine those two inevitabilities, it’s important to understand estate taxes in order to be financially prepared for what’s to come. As the name implies, estate taxes are levied against the estates of recently deceased individuals — before the money is passed on to their family members and other potential heirs.
Whether you’re getting older yourself or anticipating having to deal with the estate of a parent or loved one, it’s important to know how the estate tax works — and whether or not it’s going to apply to you. This page will walk you through what you need to know and how to prepare for the estate tax if it is going to be an issue.
A financial advisor can help you with estate taxes or any other financial issues. Consider finding one using SmartAsset’s free financial advisor matching service.
Federal Estate Tax Basics
While the estate tax sounds scary, there’s one thing that you should know before moving any further. The simple fact is that for most people reading this, the estate tax won’t ever apply to you. It only applies to estates worth a certain amount, and, to be frank, it’s more money than most families will ever have.
The estate tax exemption, as it is known, is adjusted for inflation. In 2023, it stands at $12.92 million. This means that if your estate — which includes cash and property like homes and cars — is worth less than that, you won’t owe anything in federal estate tax. You may still owe estate tax in your state — explained in more detail below.
If your estate is more than the exemption in the year you die, only the amount that exceeds the limit will be taxed. The chart below shows the estate tax rate, which is progressive — not unlike income tax rates.
FEDERAL ESTATE TAX RATES
|Taxable Estate*||Base Taxes Paid||Marginal Rate||Rate Threshold**|
|$1 – $10,000||$0||18%||$1|
|$10,000 – $20,000||$1,800||20%||$10,000|
|$20,000 – $40,000||$3,800||22%||$20,000|
|$40,000 – $60,000||$8,200||24%||$40,000|
|$60,000 – $80,000||$13,000||26%||$60,000|
|$80,000 – $100,000||$18,200||28%||$80,000|
|$100,000 – $150,000||$23,800||30%||$100,000|
|$150,000 – $250,000||$38,800||32%||$150,000|
|$250,000 – $500,000||$70,800||34%||$250,000|
|$500,000 – $750,000||$155,800||37%||$500,000|
|$750,000 – $1 million||$248,300||39%||$750,000|
|Over $1 million||$345,800||40%||$1 million|
*The taxable estate is the total above the federal exemption of $12.92 million.
**The rate threshold is the point at which the marginal estate tax rate kicks in.
It’s important to note that the federal estate tax does not apply to passing money onto your spouse. The estate tax exemption is also portable, so a married couple can apply both of their exemptions when the second spouse dies. In 2023, for example, a total of $25.84 could be used as an estate tax exemption.
Estate Tax vs. Inheritance Tax
The inheritance tax is another tax that often comes up when talking about someone who has recently died. Inheritance tax and estate tax are often confused, but they are two separate potential levies, so you need to know the difference.
While the estate tax is charged to the estate of a recently deceased person before funds are disbursed to their allotted heirs, the inheritance tax is charged to those heirs after they have already received it. There is no inheritance tax at the federal level, but several states do charge one.
Inheritance tax rates depend on the state, as does the inheritance value at which the tax kicks in. Most states also have some exemptions for certain relationships — parents, for example, may be able to pass money on to their children without an inheritance tax applying, they can’t do so for friends or grandchildren.
Gift Taxes and the Estate Tax
The federal government also has a gift tax, which has the potential to impact your estate tax destiny. The gift tax limit for 2023 is $17,000. That means you can gift as many people as you wish up to $17,000 each year without paying any gift tax.
If you give a single person a gift worth more than $17,000, you still likely won’t owe anything that year. What will happen, though, is that your lifetime estate tax exemption will go down. If you give one person $117,000, for instance, your estate tax exemption will go from $12.92 million to $12.82 million (or whatever the exemption is the year you die, minus $100,000.)
State Estate Taxes
As noted above, some states levy their own estate taxes. Here are the states that have an estate tax and their respective exemption levels:
- Connecticut — $9.1 million
- District of Columbia — $4 million
- Maine — $1 million
- Maryland — $5 million
- Massachusetts — $1 million
- Minnesota — $3 million
- New York — $6.1 million
- Oregon — $1 million
- Rhode Island — $1.7 million
- Washington — $2.2 million
The estate tax only applies to you if you live in the state when you die. Though, as noted above, there is no federal inheritance tax, the following states have an inheritance tax — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
How to Prepare for the Estate Tax
The first step to preparing for the estate tax is to look at how much money you (or a family member) has. If it’s less than $12.92 million, you don’t owe anything to the federal government. Next, look if the state you live in levies its own estate tax and if your estate is worth more than the threshold.
If you think you’re going to owe estate tax to either the federal government or your state, you should talk to a financial advisor, who will walk you through how to pay the estate tax.
The Bottom Line
The estate tax is levied against the estates of recently deceased people. The estate tax exemption at the federal level is $12.92 million for 2023, so anyone with an estate worth less than that doesn’t need to worry. In addition, 10 states also have an estate tax, each with its own exemption and rates.
Estate Planning Tips
- Regardless of the estate tax, a financial advisor can help you with planning what happens to your money after you die. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re writing a will, don’t forget to name a guardian for any minor children you have. It isn’t fun to think about, but you’ll feel better if you’ve taken care of it.
Photo credit: ©iStock.com/Dean Mitchell, ©iStock.com/Dean Mitchell, ©iStock.com/Vladimir Vladimirov