Estate Tax Calculator
The Estate Tax Calculator estimates federal estate tax due. Many states impose their own estate taxes, but they tend to be less than the federal estate tax. This calculator is mainly intended for use by U.S. residents.
U.S. Estate and Gift Tax Exemptions and Tax Rates
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Estate tax is a tax imposed on the total value of a person's estate at the time of their death. It is sometimes referred to as a "death tax" by people who view it in a negative light. In the United States, although states may impose their own estate taxes, the calculator only estimates federal estate taxes. For the context of this calculator, the definition of "estate" should not be confused with a common alternative definition, which is an interest in real property. Depending on the taxable value of an estate, relatively low-valued estates (which are most of them in the U.S.) will not require the filing of estate tax returns because they are below the tax exemptions threshold. For estates above the threshold, only the amount that exceeds the threshold for that year is taxable. Due to marital deduction, the transfer of assets to a surviving spouse is not taxable, and only assets transferred to other heirs is taxable. Although the calculator is only concerned with federal estate taxes, individual states may impose their own estate taxes. Click here to check state-specific laws.
Upon death, a deceased person's estate is usually passed onto their heirs. An heir is said to receive an inheritance if all or part of an estate from a recently deceased person is passed onto them. An inheritance tax is usually paid by a person inheriting an estate. The major difference between estate tax and inheritance tax is who pays the tax. Estate tax is paid by the deceased person's estate before the money is distributed, yet inheritance tax is paid by the person inheriting or receiving the money. While the federal government in the U.S. does not enforce an inheritance tax, some states in the U.S. enforce their own. The level of taxation applied is mainly dependent on the relationship between the deceased and the heir, and the value of the property received by the heir. However, in all states, inheritance from a spouse or domestic partner is exempt, while most inheriting children pay little or no inheritance tax. More distant inheritors may pay higher inheritance taxes.
The main purpose of estate or inheritance tax is to raise government income, but also serves a secondary purpose to redistribute wealth in a society; an estate or inheritance tax can make it difficult for generations of a family to continually accumulate and concentrate wealth while evading taxation, which eventually results in aristocracy. The idea of an inheritance tax is a fairly old concept and dates back to the Roman Empire. However, current estate tax policies are mainly derived from feudal arrangements between heirs and sovereignty in the European Middle Ages.
Determining Taxable Value of an Estate
An estate is the estimated net worth of a person, which typically consists of their assets less any liabilities. Assets can be anything of value such as cash, securities, real estate, insurance, trusts, annuities, and business interests. The value of these items is neither what was paid for them nor what their values were when acquired, but is assessed based on fair market value, which is a "reasonable amount" at which the items can be purchased by interested buyers. The total fair market value of their assets is called a gross estate. After the value of the assets is determined, certain liabilities or reductions may be deducted from the gross estate. Common liabilities include mortgages, unpaid debts, estate administration expenses, and assets that may be passed to surviving spouses or qualified charities. After accounting for liabilities, the value of lifetime taxable gifts (any gifts made in 1977 or later) is added to this net amount then reduced by the unified tax credit resulting in the taxable value of the estate.
Reducing Taxable Value
Annual Gift Tax Exclusion
The Gift Tax Exclusion allows any individual to gift a set amount each year, which is $15,000 for 2018, to as many individuals as they desire without triggering the gift tax. However, as soon as more than this set amount is gifted to any individual, the gift tax will be mandated. A gift can be anything of value such as cash, investments, real estate, or jewelry. The Gift Tax Exclusion is adjusted occasionally for inflation. However, there are certain exemptions to the gift tax:
- Charitable gifts
- Gifts to spouses
- Gifts to political organizations
- Educational expense gifts concerning tuition that are paid directly to the institution
- Medical expense gifts that are paid directly to the medical facility
The unified credit is a credit for the portion of estate tax due on taxable estates, mandated by the Internal Service Revenue (IRS) to combine both the federal gift tax and estate tax into one. It mainly serves the purpose of preventing taxpayers from giving away too much during their lifetimes in order to avoid estate taxes.
If gift taxes were paid on any gifts during a person's life, any amount over the annual gift tax exclusion will count towards the lifetime gift tax exclusion, which will then be subtracted from unified credit unless the gift tax is paid in the year it is incurred. It will then be taken as a credit against any estate tax owed. In addition, any portion of the unified credit that is unused can be used as an amount to be passed to a surviving spouse.
Example: A person gives away $2,000,000 in their lifetime and dies in 2018 and is entitled to an individual federal estate tax exemption of $11,200,000. Their federal estate tax exemption is no longer $11,200,000, but $9,200,000.
Avoiding the Estate Tax
In the United State, most people who have funds above the exemption amount don't wind up paying much estate tax according to the Urban-Brookings Tax Policy Center. Among the 3,780 estates that owe any tax, the "effective" tax rate – that is, the percentage of the estate's value that is paid in taxes – is 16.6 percent, on average. Estate and gift taxes, the congressional budget office noted, raised only about $14 billion in federal revenue in 2012. That's about one percent of the more than $1 trillion in wealth that changes hands in inheritance and gifts each year. The effective rate is so low because, first of all, the tax is only owed on that part of the estate above the exemption. But it's also easy for tax planners to help the wealthy to shield part of their taxable estate. For example, parents 'sell' part of their assets to children at discount rates, and take the tax hit themselves. Trust funds can be used to set income aside from estate taxes. There are a number of such loopholes to be taken advantage of. However, careful review with professionals is important in order to ensure that methods to reduce tax are within legal boundaries. Tax evasion is illegal and will result in serious repercussions. It is best to consult with professional estate planners who can help determining the effective and legal way to reduce estate taxes.
Apart from just avoiding Estate Taxes, good estate planning can help to ensure the smooth transition of wealth transfer from one generation to another. Such a plan ensures that family financial goals are met.
Inheritance can cause great friction within a family. By setting up an estate plan and having the whole family agree to it, such friction can be avoided. The first step is to take inventory of all the assets a family owns. Don't neglect small things. Sometimes a little work of art or a piece of jewelry can have great sentimental value, even if it isn't worth a lot of money. It's best to avoid having disputes arise over any piece of property. Then, it's important to draw up the right documents. These include a will, which shows to whom each asset is left, an assignment of power of attorney, so that one person may handle major issues, and a living will or health-care proxy (medical power of attorney), so that medical decisions can be made for those who are no longer able to make them. It's important to go over these with a lawyer as they must be mindful of both federal and state laws governing estates.
If there are sufficient assets to be distributed, the use of trusts is often recommended. Trusts are independent organizations that are managed to distribute the family's assets. They allow preconditions on how and when assets will be distributed. They protect heirs from creditors and offer significant tax protection.