Who Actually Pays the Federal Estate Tax?
Very few estates pay federal estate tax because the exemption is large. Estimates suggest fewer than 0.2% of estates owe it. The exemption was roughly doubled by the 2017 Tax Cuts and Jobs Act, but that provision is scheduled to sunset after 2025, potentially halving the exemption unless Congress acts to extend it.
How Is the Taxable Estate Calculated?
The taxable estate equals the gross estate — all assets owned at death including real estate, retirement accounts, life insurance proceeds payable to the estate, and business interests — minus allowable deductions for debts, funeral expenses, charitable bequests, and transfers to a surviving spouse. The remaining amount is compared to the exemption.
What Is the Difference Between Federal and State Estate Taxes?
Twelve states and the District of Columbia impose their own estate taxes, often with lower exemptions than the federal level — some as low as $1 million. A few states also levy an inheritance tax paid by beneficiaries rather than the estate. Understanding both federal and state obligations is essential for comprehensive estate planning.
Frequently asked questions
Does the estate tax apply to retirement accounts?
Yes. IRAs and 401(k)s are included in the taxable estate. Beneficiaries also owe income tax on distributions from inherited traditional retirement accounts, creating a double-tax burden for large inherited retirement accounts in taxable estates.
What is portability in estate tax planning?
Portability allows a surviving spouse to inherit the deceased spouse's unused estate tax exemption. The executor must file a federal estate tax return (Form 706) to elect portability, even if no tax is owed, protecting millions in additional exemption for the surviving spouse's estate.