What is the Death Tax?

Death Tax

The “death tax,” technically termed the estate tax in the United States, is the tax imposed on the value of your assets when they are transferred to your beneficiaries. Like other taxes, the estate (or death) tax can be applied on both the federal and state level.

In other countries, the death tax (estate tax) is sometimes referred to as an inheritance tax but may have different meanings or definitions.

In the United States, the estate tax (ie: death tax) is currently only required to be paid on taxable estates that come to an amount over 1 million dollars. Only the wealthiest 2% of Americans will have this tax applied to their estates.

How Much, In Tax, is Applied to Your Estate When It’s Transferred to Your Beneficiary?

The first step in determining what will be taxed is calculating your gross estate. Your gross estate is the collective value of everything that you own plus what you have interests in at the time of your death.

The government does not base this off of what you paid for your assets, but what the current fair value of the assets are. Any life insurance policies paid out may have the tax applied to them.

The next step is removing the deductible value from your gross estate. Estate tax deductibles can include other costs associated with inheriting said estate, such as mortgages, estate administration expenses, qualified charity contributions, property transferred to a spouse, and other debts.

Once the net amount of your estate is determined, all the taxable gifts you’ve made since 1977 are added to the total amount.

This addition brings you to the final taxable estate or death tax that will be applied to your estate when it is transferred to your beneficiary. Again, estates that come out to a value of less than one million dollars will not fall under the estate tax law or scope.

Death Tax Exemptions

The death tax exemption, aside from those that are not large enough to apply, is usually for estates transferred to a spouse or charity organization. These beneficiaries usually will not have to be taxed on the amount they receive.

What Is The Estate Tax?

The Estate Tax is a governmental tax on your right to transfer property upon your death.

The IRS performs an analysis of everything you own or have certain interests in at the date of death (IRS Form 706). The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.

Taxable Estate

Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.

Value of Lifetime Taxable Gifts

After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit.

Do You Have To File An IRS Form?

Check with your accountant, but most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $1,500,000 in 2004 – 2005; $2,000,000 in 2006 – 2008; $3,500,000 for decedents dying in 2009; and $5,000,000 or more for decedent’s dying in 2010 and 2011 (note: there are special rules for decedents dying in 2010); $5,120,000 in 2012, $5,250,000 in 2013, $5,340,000 in 2014, $5,430,000 in 2015, and $5,450,000 in 2016.

Can Unused Exemptions Be Passed To Spouse?

Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse. This election is made on a timely filed estate tax return for the decedent with a surviving spouse. Note that simplified valuation provisions apply for those estates without a filing requirement absent the portability election.

For additional information, refer to Instructions for IRS Form 706.