Estate Tax

The distribution of a decedent's estate is subject to the estate tax, which is a federal tax. An estate tax is imposed when the amount exceeds a specified exclusion threshold.. Only the portion that is greater than the minimal amount is liable to tax.

The federal government and certain state governments evaluate these taxes based on the fair market value (FMV) of the estate, rather than the cost at which the deceased individual acquired their assets. The state responsible for imposing the tax is the one in which the deceased individual resided at the time of their passing.

How Federal Estate Taxes Work

For 2022 and 2023, the Internal Revenue Service (IRS) mandates that estates with total gross assets and past taxable gifts that exceed $12.06 million file a federal estate tax return and pay the applicable estate tax. Estate taxes would be imposed on $80,000 of a $13 million estate with a $12.92 million exclusion limit in 2023.

The estate tax on assets transmitted to a surviving spouse is removed by the unlimited marital deduction. However, if the estate exceeds the exclusion amount after the death of the surviving spouse who received an inheritance, the beneficiaries may be required to pay estate taxes.

Estate Tax and Gift Tax

Estate taxes can be avoided if you gift assets before you pass away because they are assessed on a person's assets and estate after death. The federal gift tax, however, is imposed on the transfer of assets while the taxpayer is still alive that exceeds certain thresholds. The gift tax, according to the IRS, is imposed regardless of whether the giver intended the transfer to be a gift.

Gift Tax Exclusion

Rich gift exclusions are available from the IRS. The yearly exclusion for 2022 is $16,000, which permits taxpayers to make unlimited gifts to anyone without incurring any tax liability. The annual exclusion rises to $17,000 for tax year 2023.

These regulations make gifting an efficient method of avoiding tax on assets transferred to persons who may be liable to the estate tax if the assets were transferred as part of an estate, such as non-family relatives.

Jurisdictions With Estate Taxes

The following threshold minimums apply to estate taxes in certain jurisdictions as of 2022. Connecticut passed legislation that will align its exemption with the federal exemption starting in 2023.

  • Connecticut ($12,920,000 to equal the federal exemption for 2023)
  • District of Columbia ($4,254,800)
  • Hawaii ($5,490,000)
  • Illinois ($4,000,000)
  • Maine ($6,010,000)
  • Maryland ($5,000,000)
  • Massachusetts ($1,000,000)
  • Minnesota ($3,000,000)
  • New York ($6,110,000)
  • Oregon ($1,000,000)
  • Rhode Island ($1,648,611)
  • Vermont ($5,000,000)
  • Washington State ($2,193,000)

Key Takeaways

  • An estate is subject to an economic tax depending on the market value of its assets.
  • For 2022 and 2023, assets worth more than $12.06 million and $12.92 million, respectively, are subject to federal estate taxes.
  • Estate taxes are not applied to assets transmitted to spouses.
  • The assets of an estate may be liable to inheritance tax for their recipients.
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