What is estate tax? An estate includes everything a person owned at death, including money and property. The federal government imposes a tax on the value of an individual's estate at the time of their death.
However, this only applies to estates valued over a certain amount. Here's how the estate tax could affect your family.
What Is Estate Tax?
The estate tax, also known as a "death tax," is a federal tax that applies to the assets of a deceased individual. Assets are everything you own at the time of your death. The estate tax only applies to estates valued over a certain amount, which changes every year based on inflation. For example, in 2022 it is $12,060,000 per individual (an increase from $11,700,000 in 2021) or $24,120,000 for married couples.
Why Might You Owe Estate Taxes?
The most common reason your estate might owe estate taxes is if you owned real estate investments such as rental homes or undeveloped land that has increased substantially in value since purchasing. However, if your total net worth accumulates above the federal threshold, other assets may also be subject to taxation, including business interests, stocks, bonds, and life insurance policies.
What Is the Estate Tax Exemption, and Who Qualifies?
The estate tax exemption determines the amount of an individual or married couple's estate that is exempt from taxation. The IRS recently updated the amount for the estate tax exemption to $12,060,000 per individual in 2022. A married couple can exempt $24.12 million from estate taxes under the unlimited marital deduction. If the entirety of your estate falls below that figure, you will not be responsible for paying estate taxes.
The exemptions are indexed for inflation, so they will go up slightly each year. This means that only the largest estates are subject to the tax. If you're not sure whether your estate will be subject to the estate tax, consider consulting with an accountant or attorney.
Who Pays Estate Taxes?
Generally speaking, the person who inherits an asset that is subject to the estate tax must pay it. However, there are a few exceptions, such as if the beneficiary was designated in a will or trust prior to death. In addition, certain types of assets may be passed on without incurring any estate taxes. For example, assets that are left to a spouse or charity are typically exempt from the tax.
Will My Family Have To Pay Estate Taxes?
If your estate is valued at less than the exemption amount set by the IRS, the government will not impose a tax on your estate.
What Should I Do if I Think My Family Might Owe Estate Taxes?
If your family potentially owes estate taxes, consult with a qualified accountant or attorney who can help determine whether or not an estate tax return should be filed. The filing deadline is generally around nine months after the date of death, so it's important not to wait too long before beginning the process. However, if you need it, you can request a six-month extension as long as you meet certain requirements.
As a way to reduce the possibility of paying estate taxes, many individuals utilize financial vehicles such as trusts or gifts of money to family members in an effort to lower the value of their overall estate. The annual exclusion for gifts is $16,000 as of 2022, up from $15,000 in 2021.