What Is the Estate Tax Exemption?
The federal estate tax exemption—the amount below which your estate is not subject to taxes when you die—which increased in 2022. That’s actually normal, because the amount is adjusted each year for inflation.
- The federal estate tax exemption for 2022 is $12.06 million, increasing to $12.92 million in 2023.
- The estate tax exemption is adjusted annually to reflect changes in inflation every year.
- The current exemption was doubled under the Tax Cuts and Jobs Act (TCJA) and is set to expire in 2026.
- In 2020, less than 0.1% of estates had to file an estate tax return due to exceeding the exemption amount.
- Federal estate tax is closely related to the Federal gift tax, and it does not exclude or exempt from the generation-skipping transfer tax either.
Understanding the Estate Tax Exemption
For 2022, the personal federal estate tax exemption amount is $12.06 million. It will increase to $12.92 million for 2023. This means that when someone dies and the value of their estate is calculated, any amount more than $12.06 million is subject to the federal estate tax unless otherwise excluded. A married couple has a combined exemption for 2022 of $24.12 million ($25.84 million for 2023).
Given the size of the estate tax exemption, the number of Americans who die each year with an estate subject to an estate tax is small. For example, just under 3.4 million Americans passed away in 2020. Of these, only 3,441 estates, or about 0.1%, had to file a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Of that number, just 1,275, or just under 0.04%, actually paid an estate tax. The total collected that year was $9.3 billion.
Though the $12.06 million estate tax exemption eliminates the vast majority of estates from paying an estate tax, it does not eliminate all of them. If you are the executor of an estate with a gross estate value above $12.06 million—after adding adjusted taxable gifts and subtracting the amount greater than the exemption amount—then that excess is subject to the estate tax.
Estate Tax Rates
Many people think that the estate tax is 40% on any taxable amount. That’s not true. For most of the federal estate tax tiers, you’ll pay a base tax plus a marginal rate. Current federal estate taxes max out at 40% for taxable amounts greater than $1 million. The table below shows how the tax would accumulate as the taxable amount increases.
|Taxable Amount||Estate Tax Rate||What Your Estate Would Pay|
|$0–$10,000||18%||—$0 base tax
—18% on taxable amount
|$10,001–$20,000||20%||—$1,800 base tax
—20% on taxable amount
|$20,001–$40,000||22%||—$3,800 base tax
—22% on taxable amount
|$40,001–$60,000||24%||—$8,200 base tax
—24% on taxable amount
|$60,001–$80,000||26%||—$13,000 base tax
—26% on taxable amount
|$80,001–$100,000||28%||—$18,200 base tax
—28% on taxable amount
|$100,001—$150,000||30%||—$23,800 base tax
—30% on taxable amount
|$150,001–$250,000||32%||—$38,800 base tax
—32% on taxable amount
|$250,001–$500,000||34%||—$70,800 base tax
—34% on taxable amount
|$500,001–$750,000||37%||—$155,800 base tax
—37% on taxable amount
|$750,001–$1,000,000||39%||—$248,300 base tax
—39% on taxable amount
|$1,000,000+||40%||—$345,800 base tax
—40% on taxable amount
Source: Internal Revenue Service
History of Estate Tax Exemption Rates
Estate tax exemptions began with the Revenue Act of 1916, which imposed a transfer of wealth tax on the estate of any deceased U.S. citizen valued above $50,000 at the time of death. The exemption remained at $50,000 until 1926, when it was raised to $100,000. In 1932, the exemption dropped back to $50,000. The lowest exemption in U.S. estate tax history was $40,000, from 1935 to 1942.
From 1916 to 2007, the estate tax exemption gradually rose until it reached $2 million in 2007. Then, under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, the estate tax exemption gradually increased until it stood at $3.5 million in 2009. By this time, only 5,700 estates paid a transfer of wealth tax, and that number has been lower ever since, no doubt in part because the exemption amount has gone up—most notably with the passage of the Tax Cuts and Jobs Act (TCJA) in 2017 that doubled the exemption to $11.18 million in 2018 (indexed for inflation thereafter).
This change—like most changes in that legislation—came with an expiration date. In this case, on Jan. 1, 2026, the estate tax exemption is set to drop back to what it was before 2018: $5 million (adjusted for inflation).
The current $12.06 million estate tax exemption, annually adjusted for inflation, is set to roll back to pre-2018 amounts in 2026.
A related tax is the gift tax, imposed on value given away to or for the benefit of a single person within a calendar year. Similar to the estate tax exemption, the IRS imposes an exclusion every year. In 2022, the IRS gift tax exclusion was $16,000; this has been increased to $17,000 for 2023.
The gift tax is related to estate taxes as the estate's executor will determine the value of your estate in addition to the total amount of taxable gifts made during your lifetime. If the total net amount after deductions is greater than the $12.06 million estate tax exemption, the estate will likely need to pay estate tax on the excess amount.
Generation-Skipping Transfer Tax
Another related tax is the generation-skipping transfer (GST) tax, an assessment on other lifetime gifts and post-death transfers made to individuals more than one generation removed from the deceased. If the total amount of gifts made to these individuals more than one generation removed exceed the GST tax exemption, a flat 40% tax is imposed on the excess amount of gifts.
The GST tax exemption amount and changes mirror the estate tax exemptions. The GST tax exemption increases from $12.06 million in 2022 to $12.92 million in 2023. One important distinction is that gifts made to individuals more than one generation removed are also reportable for tax purposes for estate taxes. Therefore, it is possible to be liable for both estate tax and GST tax.
What Is the Difference Between Estate Tax and Inheritance Tax?
Estate tax is levied on the value of an estate at the time of the deceased's passing. Alternatively, inheritance tax is an assessment on the amount received by a beneficiary. The beneficiary pays inheritance tax, while the estate of the deceased pays the estate tax.
How Many Estates End Up Being Taxed?
Fewer than 0.1% of U.S. estates must file tax forms, with only 0.04% of estates paying tax. Still, in 2020, the tax generated $9.3 billion of revenue for the federal government.
What Is the Future of the Estate Tax?
The Tax Cuts and Jobs Act (TCJA) doubled the exemption amount to $11.18 million in 2018, indexed to inflation. However, that provision is set to expire as of Jan. 1, 2026, which would return the exemption to its previous amount of $5 million (adjusted for inflation) as of 2017.
How Much Can You Inherit From Your Parents Without Paying Taxes?
An estate's tax liability will vary depending on where the estate is located. The IRS threshold for estate values is $12.06 million for 2022, increasing to $12.92 million in 2023. Anything below this amount is not subject to estate taxes. Additionally, different states have different threshold tax amounts and tax percentages for state excise taxes.
What Is the New York Estate Tax Exemption for 2022?
New York imposes an estate tax rate between roughly 3% and 16%. For 2022, the basic exclusion amount for a date of death in 2022 is $6,110,000.
The Bottom Line
Every year, the IRS evaluates the estate tax exemption. This floor determines the minimize size of an estate to be assessed federal taxes. For 2022, the federal estate exemption is $12.06 million, and it will increase to $12.92 million in 2023. Estates smaller than this amount are not subject to federal taxes, though individual states have their own rules.
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