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What is Estate Tax?
The estate tax is a federal or state tax levied on the transfer of a person's assets after their death. It's calculated based on the net worth of the deceased person's "taxable estate." This includes all assets like cash, real estate, stocks, bonds, business interests, and other personal property, minus certain deductions.
How Estate Taxes Work
The process generally involves these steps:
- Calculating the Gross Estate: This is the total fair market value of all assets owned by the deceased at the time of death.
- Subtracting Deductions: Allowable deductions are subtracted from the gross estate. These include debts, funeral costs, administrative expenses, charitable contributions, and assets left to a surviving spouse (the marital deduction).
- Determining the Taxable Estate: The value after deductions is the taxable estate.
- Applying the Tax Rate: A progressive tax rate is applied to the taxable estate amount that exceeds the lifetime exemption limit.
Federal vs. State: The U.S. federal government imposes an estate tax, but with a very high exemption amount ($13.61 million in 2025). Only a small number of states impose their own separate estate tax, often with much lower exemption levels.
Key Deductions Explained
- Marital Deduction: This allows for the unlimited transfer of assets to a surviving spouse without incurring any estate tax. This defers the tax until the surviving spouse's death.
- Charitable Deduction: Any portion of an estate left to a qualified charity is fully deductible, reducing the size of the taxable estate.
- Debts and Expenses: The estate can deduct outstanding debts (like mortgages or loans), as well as funeral expenses, legal fees, and other administrative costs required to settle the estate.
Estate Tax vs. Inheritance Tax
These two terms are often confused, but they are different. Estate tax is paid by the estate of the deceased person before assets are distributed. Inheritance tax is paid by the person who inherits the assets. The federal government does not have an inheritance tax, but a few states do.
Frequently Asked Questions (FAQ)
1. What is the estate tax?
The estate tax is a tax on the transfer of a person's assets to their heirs and beneficiaries after their death. It is calculated based on the net value of the 'taxable estate,' which includes cash, securities, real estate, insurance, and other assets.
2. How do I calculate estate tax liability?
To calculate estate tax, you first determine the gross estate value. Then, subtract allowable deductions like debts, funeral expenses, charitable donations, and marital deductions to find the 'taxable estate.' The tax is then calculated on this taxable amount, minus any applicable tax credits (like the unified credit).
3. What is the federal estate tax exemption for 2025?
For 2025, the federal estate tax exemption is $13.61 million per individual. This means an estate with a net value below this amount generally does not owe any federal estate tax. This amount is indexed for inflation and can change annually.
4. Do all states have estate taxes?
No, most states do not have an estate tax. As of 2025, only a handful of states impose their own estate tax, and each has its own exemption amounts and tax rates, which are often much lower than the federal exemption.
5. What is the difference between estate tax and inheritance tax?
Estate tax is paid by the deceased person's estate before any assets are distributed to heirs. Inheritance tax, on the other hand, is paid by the person who inherits the money or property. The federal government does not have an inheritance tax, but a few states do.
6. Can I reduce estate taxes legally?
Yes, there are several legal strategies to reduce or eliminate estate taxes. These include making lifetime gifts, setting up various types of trusts (like an irrevocable life insurance trust), making charitable donations, and utilizing the marital deduction.
