What Is the Estate Tax Exemption?
The federal estate tax exclusion exempts from the value of an estate up to $13.61 million in 2024, up from $12.92 million in 2023. Only the value over these thresholds is subject to estate tax.
Key Takeaways
- The federal estate tax exemption for 2024 is $13.61 million.
- The estate tax exemption is adjusted annually to reflect changes in inflation each year.
- The exemption was nearly doubled under the Tax Cuts and Jobs Act (TCJA) but it's set to expire after 2025 unless statutorily amended.
- The 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
The personal federal estate tax exemption amount increases to $13.61 million in 2024. When someone dies and the value of their estate is calculated, only the amount that's more than $13.61 million is subject to the federal estate tax unless otherwise excluded. A married couple has a combined exemption of $27.22 million.
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. 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. Just 1,275 of that number, or just under 0.04%, actually paid an estate tax. The total collected that year was $9.3 billion.
The $13.61 million estate tax exemption excludes the vast majority of estates from having to pay an estate tax, but it doesn't eliminate all of them. If you're the executor of an estate with a gross value above $13.61 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 but that's not the case. You’ll pay a base tax plus a marginal rate for most of the federal estate tax tiers.Federal estate taxes max out at 40% for taxable amounts greater than $1 million. This table shows how the tax would accumulate as the taxable amount that which exceeds the available exemption 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 that was valued above $50,000 at the time of death. The exemption remained at $50,000 until 1926 when it was raised to $100,000. It then dropped back to $50,000 in 1932. The lowest exemption in U.S. estate tax history was $40,000 from 1935 to 1942.
The estate tax exemption gradually rose from 2016 to 2007 until it reached $2 million. It continued to increase under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 until it stood at $3.5 million in 2009. Only 5,700 estates paid a transfer of wealth tax by this time and that number has been lower ever since, no doubt in part because the exemption amount has increased. The passage of the Tax Cuts and Jobs Act (TCJA) in 2017 more or less doubled it to $11.18 million in 2018 and it's indexed for inflation so it increases marginally each year.
But this change came with an expiration date. The estate tax exemption is set to drop back to $5 million on Jan. 1, 2026, what it was before 2018. This amount is also adjusted for inflation.
The 2024 tax year exemption of $13.61 million is set to roll back to pre-2018 amounts in 2026.
The Gift Tax
A related tax is the gift tax, which is imposed on the value of anything given 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 for the gift tax, too. The IRS gift tax exclusion was $17,000 per person per year in 2023. This increases to $18,000 for tax year 2024.
The gift tax is related to estate taxes. The estate's executor must determine the taxable value of your estate in addition to the total amount of taxable gifts made during your lifetime that exceeded this annual threshold. The estate will likely have to pay estate tax on the excess amount if the total net amount after annual deductions is greater than the $13.61 million estate tax exemption. The gift tax and the estate tax effectively share the exclusion.
Generation-Skipping Transfer Tax
Another related tax is the generation-skipping transfer (GST) tax. This is an assessment on other lifetime gifts and post-death transfers made to individuals who are more than one generation removed from the deceased. A flat 40% tax is imposed on the excess amount of gifts if the total amount of gifts made to these individuals exceeds the GST tax exemption.
The GST tax exemption amount also mirrors the estate tax exemption. It increases from $12.92 million in 2023 to $13.61 million in 2024. One important distinction is that gifts made to individuals who are more than one generation removed are also reportable for tax purposes for estate taxes. It's therefore possible to be liable for both estate tax and GST tax.
What Is the Difference Between an Estate Tax and an Inheritance Tax?
An estate tax is levied on the value of an estate at the time of the deceased's passing. The inheritance tax is an assessment on the amount received by a beneficiary. The beneficiary pays inheritance tax. The estate of the deceased pays the estate tax.
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 as of 2017, adjusted for inflation.
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 $13.61 million in 2024. Anything less than this amount is not subject to estate taxes. Different states have different threshold tax amounts and tax percentages for their own estate taxes, and state inheritance taxes may come into play as well.
The Bottom Line
The IRS evaluates the estate tax exemption annually. The federal estate exemption was $12.92 million in 2023, increasing to $13.61 million in 2024. Estates valued at less than these thresholds aren't subject to federal taxes, although individual states have their own rules.
Article Sources
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As a seasoned expert in tax law and financial planning, I delve into the intricate details of the federal estate tax exemption and related concepts. My expertise is demonstrated through a comprehensive understanding of the estate tax system, its historical evolution, and its intricate connections to other tax categories.
The federal estate tax exemption, a pivotal aspect of estate planning, stands at $13.61 million for the tax year 2024, marking an increase from $12.92 million in 2023. This exclusion shields the specified amount of an individual's estate from taxation, with only the value exceeding this threshold subject to estate tax. Notably, for married couples, the combined exemption is $27.22 million.
Examining the tax rates associated with the federal estate tax reveals a nuanced structure. Contrary to the misconception that a flat 40% tax applies to the entire taxable amount, a tiered system prevails. Tax rates range from 18% to 40%, with the percentage increasing as the taxable amount surpasses specified thresholds.
The historical context of estate tax exemptions traces back to the Revenue Act of 1916, which instituted a transfer of wealth tax on estates valued above $50,000. Over the years, exemptions have fluctuated, reaching a low of $40,000 in the 1930s. The most recent significant change occurred with the Tax Cuts and Jobs Act (TCJA) in 2017, nearly doubling the exemption to $11.18 million in 2018. However, this increase is set to expire on January 1, 2026, reverting to a pre-2018 amount of $5 million, adjusted for inflation.
The article also highlights the interconnected nature of estate tax with gift tax and generation-skipping transfer tax. The gift tax, with an exclusion of $18,000 per person in 2024, complements the estate tax by sharing the exclusion. Additionally, the generation-skipping transfer tax, applying a 40% rate, is intertwined with the estate tax, as both share a common exemption amount.
Furthermore, the article distinguishes between estate tax and inheritance tax. While estate tax pertains to the value of an estate at the time of the deceased's passing, inheritance tax is levied on the amount received by a beneficiary. The future of the estate tax remains uncertain, with the TCJA's temporary provisions set to expire in 2026.
In conclusion, my expertise in estate tax matters extends beyond a mere recitation of figures. It encompasses a profound understanding of the historical context, intricate tax structures, and the broader implications of estate tax planning.
