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Understanding Estate Tax Limits

Understanding Estate Tax Limits

October 18, 2022

Estate Tax is a tax on your right to transfer property at your death. Everything you own or have a financial interest in at death become part of your estate.

Federal estate taxes help to fund the federal government and have been around in some form or another since the inception of the United States. The Congressional Budget Office reports, “In 2020, revenues from federal estate and gift taxes totaled $17.6 billion (equal to 0.1% of gross domestic product, or GDP).”

Thankfully, estate tax is something most people do not have to worry about - that is because estates under $12.06 Million are exempt. Most individuals do not have estates over this amount. But this exclusion amount has not always been so high, and it could change in the future.

It has gone through many changes over time. In 1980 estates over $161,000 were subject to the federal estate tax and the highest tax rate was 70%! Since that time, we have seen the exemption amount increase and the highest tax rate decrease.

Today, estates under $12.06 million are exempt from these taxes. For larger estates, only the amount over the $12.06 million exemption level is subject to estate taxes and the highest tax rate on the amount over the exemption tops out at 40%.

Estate and gift taxes share the same rate and $12.06 million lifetime exemption amount, in what is called a unified system. While death triggers the estate tax, gift taxes are applied to transfers during your life.

Since that same $12.06 million exemption amount applies most gifts do not end up being taxable. Many people like to stay within the $16,000 per year per recipient gift limit so they do not have to file a gift tax return. If a married couple is giving a gift, they are able to each gift $16,000 for a total of $32,000 per recipient however this could be considered gift-splitting and may require the filing of a gift tax return. If a single person gives a $20,000 gift to their child, they will need to file a gift tax return for the overage amount ($4,000). Filing a gift tax return does not make the gift taxable but it is a record keeping tool to tally how much of your estate and gift lifetime exemption amount is being used. Interestingly enough, if that single person gives $10,000 to their child and $10,000 to that child’s spouse both gifts are under the $16,000 gift limit and a gift tax return is not required. You can give as many gifts as you choose each year and if they are all at or under the annual exclusion amount, $16,000 in 2022 you do not need to file a gift tax return.

The Tax Cuts and Jobs Act of 2017 increased the estate and gift tax exemption, but this is a temporary change and is set to end December 31, 2025 and January 1, 2026 the exemption is due to return to the $5.49 million adjusted for inflation that is estimated to be approximately $6.4 million per person 

Currently married individuals can transfer any unused exemption amount to their surviving spouse, which effectively doubles the exemption for married couples to $24.12 million or what may be $12.8 million in 2026.

In addition to the federal estate tax, twelve states and the District of Columbia impose estate taxes. The estate tax rate of these states ranges from 16% to 20% and the exemption levels range from $1 million to $9.1 million. Maryland’s exclusion for estate taxes is $5 million and the top tax rate is 16%. Maryland also levies an inheritance tax. You can read more about estate and inheritance taxes here