What Is an Estate Tax?
The estate tax is a federal levy imposed on the transfer of the estate of a deceased person. It applies when the estate’s value exceeds a legally established exclusion limit. Only the amount surpassing this threshold is subject to taxation.
Key Insights
- Estate tax is assessed based on the current fair market value of the assets.
- For 2023, federal estate taxes apply to estates worth more than $12.92 million, and this limit rises to $13.61 million in 2024.
- Transfers to spouses are exempt from the estate tax.
- Beneficiaries receiving estate assets may also face inheritance tax.
Navigating Federal Estate Taxes
The Internal Revenue Service (IRS) mandates estates with combined gross assets and prior taxable gifts exceeding $12.92 million in 2023 and $13.61 million in 2024 to file a federal estate tax return. Estate taxes would be calculated on the amount over these limits. For an estate worth $13.7 million in 2024, taxes would apply to $90,000 of the estate.
Thanks to the unlimited marital deduction, assets transferred to a surviving spouse are not subject to estate tax. However, when this surviving spouse passes away, their beneficiaries may owe estate taxes if the estate exceeds the exclusion limit.
State-Level Estate Tax Details
Even if an estate bypasses federal tax, it may still be liable for state-level estate taxes, particularly in jurisdictions taxing estates valued under certain thresholds.
States with Estate Taxes and Their Thresholds (2024)
- Connecticut : $13,610,000
- District of Columbia : $4,710,000
- Hawaii : $5,490,000
- Illinois : $4,000,000
- Maine : $6,410,000
- Maryland : $5,000,000
- Massachusetts : $2,000,000
- Minnesota : $3,000,000
- New York : $6,940,000
- Oregon : $1,000,000
- Rhode Island : $1,774,583
- Vermont : $5,000,000
- Washington State : $2,193,000
Estate Tax Vs. Gift Tax
By gifting assets before death, individuals can avoid some estate taxes. However, federal gift tax rules still apply within certain limits. The gift tax applies regardless of whether the donor intended the transfer to be a gift.
Gift Tax Exclusion Caps
For 2024, the annual gift tax exclusion allows tax filers to gift up to $18,000 per person tax-free, up from $17,000 in 2023.
Strategizing gifts can mitigate tax on assets transferred to non-spousal heirs who might otherwise face estate tax.
Managing Over-limit Gifts
Gifts exceeding the exclusion aren’t immediately taxed. Instead, these amounts contribute to the taxable value of the estate at death. For example, gifting $79,000 in 2024, with an exclusion of $18,000, means $61,000 is documented and deducted from your lifetime exclusion, impacting your estate exclusion as well.
Distinguishing Between Estate Tax and Inheritance Tax
An estate tax is levied on the estate before the assets are distributed to beneficiaries, while an inheritance tax applies to beneficiaries receiving those assets.
Operational Insights on Inheritance Tax
At the federal level, there is no inheritance tax. However, states like Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania do levy this tax. Maryland applies both estate and inheritance taxes.
The state where the beneficiary resides assesses inheritance tax, with exemptions varying based on the relationship to the deceased and other factors.
Common Inheritance Tax Exceptions
Life insurance payouts to named beneficiaries are generally exempt from inheritance tax. Exemptions also often apply to surviving spouses and domestic partners. Certain states exempt younger descendants, such as those under 21.
States with Inheritance Taxes and Their Thresholds (2024)
- Iowa : $12,500 (abolishing tax in 2025)
- Kentucky : $500-$1,000
- Maryland : $50,000-$100,000
- Nebraska : $25,000-$100,000
- New Jersey : $25,000
- Pennsylvania : $3,500
Given the potentially high rates of estate tax, detailed estate planning is crucial for those with substantial estates aimed for inheritance.
Related Terms: inheritance tax, gift tax, tax exclusion, fair market value.
References
- Internal Revenue Service. “Estate Tax”.
- Internal Revenue Service. “Estate Tax”.
- Internal Revenue Service. “Frequently Asked Questions on Estate Taxes”. Click What Deductions Are Available To Reduce the Estate Tax?
- Peter G. Peterson Foundation. “What Are Estate and Gift Taxes and How Do They Work?”
- Connecticut General Assembly. “Chapter 217* Estate Tax”.
- JRC Insurance Group. “The Complete List of States With Estate Taxes (Updated for 2024)”.
- Internal Revenue Service. “Gift Tax”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2024”.
- Internal Revenue Service. “Publication 559 (2023): Survivors, Executors, and Administrators”. Pages 36-40.
- Cornell Law School Legal Information Institute. “Estate Tax”.
- Tax Foundation. “Does Your State Have an Estate or Inheritance Tax?”
- Legal Information Institute. “Inheritance Tax”.
- Progressive. “Is Life Insurance Taxable?”
- Internal Revenue Service. “Life Insurance and Disability Insurance Proceeds”.
- New Jersey Division of Taxation. “New Jersey Transfer Inheritance and Estate Taxes - Domestic Partnership Act”.
- University of Nebraska-Lincoln. “Nebraska Inheritance Tax Update”.
- Pennsylvania Department of Revenue. “Inheritance Tax”.
- Iowa Code. “450.98 Tax Repealed”.
- Iowa Department of Revenue. “Iowa Inheritance Tax Rates: 2023”.
- Kentucky Department of Revenue. “A Guide to Kentucky Inheritance and Estate Taxes”. Page 1.
- Register of Wills Association. “Administration of Estates in Maryland”. Page 2.
- State of New Jersey. “Transfer Inheritance and Estate Tax”. Page 4.
- Pennsylvania Department of Revenue. “Pennsylvania Inheritance Tax & Safe Deposit Boxes”. Page 2.
