Estate Tax Calculator

Estate Tax

An estate tax is a tax imposed on the total value of a person’s estate at the time of their death. It is sometimes referred to as a “death tax.” Although states may impose their own estate taxes in the United States, this calculator only estimates federal estate taxes (Click here to check state-specific laws). For the context of this calculator, the definition of “estate” should not be confused with a common alternative definition, which is an interest in real property. Depending on the taxable value of an estate, relatively low-valued estates will not require the filing of estate tax returns because they are below the tax exemptions threshold. For estates above the threshold, only the amounts that exceed the threshold for that year are taxable. The calculator can help determine this threshold. Due to marital deduction, the transfer of assets to a surviving spouse is not taxable, and only assets transferred to other heirs are taxable.

In the United States, most people who have funds above the exemption amount ultimately won’t end up paying much estate tax, according to the Urban-Brookings Tax Policy Center. Estate and gift taxes, the congressional budget office noted, raised only about $17.6 billion in federal revenue in 2020. That’s about one percent of the more than $1 trillion in wealth that changes hands in inheritance and gifts each year. The effective rate is low for several reasons. Firstly, as mentioned above, the estate tax only applies to the portion of the estate above the exemption. Secondly, there are various legal loopholes that allow people to shield their wealth from Uncle Sam. For instance, parents “sell” parts of their assets to children at discounted rates and take the tax hit themselves. Also, trusts, which are explained in detail below, are a common and viable method to reduce taxable estates.

Inheritance Tax

Upon death, a deceased person’s estate is usually passed onto their heirs. An heir is said to receive an inheritance if all or part of an estate from a recently deceased person is passed onto them. An inheritance tax is usually paid by a person inheriting an estate. The major difference between estate tax and inheritance tax is who pays the tax. The estate tax is paid based on the deceased person’s estate before the money is distributed, but inheritance tax is paid by the person inheriting or receiving the money. While the federal government in the U.S. does not enforce an inheritance tax, some states in the U.S. enforce their own. The level of taxation applied is mainly dependent on the relationship between the deceased and the heir, and the value of the property received by the heir. However, in all states, inheritance from a spouse or domestic partner is exempt, while most inheriting children pay little or no inheritance tax. More distant inheritors tend to pay higher inheritance taxes.

The main purpose of the estate or inheritance tax is to raise government income, but it also serves a secondary purpose to redistribute wealth in society; an estate or inheritance tax can make it difficult for generations of a family to continually accumulate and concentrate wealth. The idea of an inheritance tax is a fairly old concept and dates back to the Roman Empire. However, current estate tax policies are mainly derived from feudal arrangements between heirs and sovereignty in the European Middle Ages.

Determining Taxable Value of an Estate

An estate is the estimated net worth of a person, which typically consists of their assets less any liabilities. Assets can be anything of value, such as cash, securities, real estate, insurance, trusts, annuities, and business interests. The value of these items is neither what was paid for them nor what their values were when acquired, but is assessed based on fair market value, which is a “reasonable amount” at which the items can be purchased by interested buyers. The total fair market value of a person’s assets is called a gross estate. After the value of the assets is determined, certain liabilities or reductions may be deducted from the gross estate. Common liabilities include mortgages, unpaid debts, estate administration expenses, and assets that may be passed to surviving spouses or qualified charities. After accounting for liabilities, the value of lifetime taxable gifts (any gifts made in 1977 or later) is added to this net amount then reduced by the unified tax credit resulting in the taxable value of the estate.

Reducing Estate Tax

There are several things that can be done in order to reduce estate taxes.

1. Use up the accumulated wealth! This is the quickest and easiest way to reduce the value of an estate. Just be wary not to spend too frivolously; it’s important for people to take into consideration how long they are expected to live and how much money they will need.
2. Donate to charity. Any assets gifted to a qualified 501(c)3 organization will avoid federal estate taxation. There is no limit on the amount that can be donated to charity.
3. If not already, get married. Dying without a legal spouse can subject all assets to estate tax, but if there is a spouse involved, no estate tax will be imposed. Instead, all assets will fall under the ownership of the surviving widow(er). Keep in mind that gifts given to spouses must occur at least four years before death.
4. Move to a new state. Including the District of Columbia, 19 states currently have a state estate or inheritance tax. These states are Connecticut, Delaware, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington. Anyone who currently lives in any of these states that wish to reduce their death tax can choose to move to a different state.
5. Use an alternate valuation date. Normally, the fair market value of property in an estate is estimated on the date of death. However, there are certain situations in which the executor may choose an alternate valuation date, which is six months after the date of death. It only tends to be available if it is estimated to decrease both the gross amount of the estate and the estate tax liability, which results in a larger inheritance.