The estate tax (also known as the death tax) is one of three taxes on assets and businesses passed from one person to another, whether through wills, trusts, or gifts. The other two are the gift tax and the generation-skipping transfer tax.
They all have similar rules and exceptions. The government began taxing estates in 1916, shortly after passing the permanent federal income tax in 1913 with the passage of the Sixteenth Amendment.
The estate tax (or death tax) has had many different tax rates as well as many different exception levels over the years. Here we will talk about exactly what the estate tax (or death tax) is, including what it applies to and what it doesn’t. We will also talk about the current (2021) tax rate and exception levels.
What is the Estate Tax (Death Tax)?
Simply stated, the estate tax (death tax) is a tax on the estate of a decedent after they die. When an individual passes, the executor of their estate must file a tax return and pay the estate tax due within nine months. The estate tax (death tax) applies to all your assets; real estate, stocks, bonds, retirement accounts, cars, checking and saving accounts, personal assets including furniture, etc.
Current Estate Tax Rate and Exemption Level
The current estate tax (death tax) rate is 40%, and is fixed until the end of 2025. For individuals, the 2020 estate tax exemption is $11.58 million and twice that for married couples ($23.16 million).
The estate tax (and the gift tax) allow for unlimited deductions on transfers to a surviving spouse and also for donations to charity. Before calculating the estate tax (death tax) that is owed, the executor can also deduct debts, funeral costs, legal and administrative fees, charitable bequests, and estate tax paid to states.
Estate tax (death tax) preparation is extremely important for high net worth individuals, which often includes those with small businesses. Estate tax planning should be part of any discussion by families about finances.
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