Estate Planning

Estate Tax: Definition, Tax Rates and Who Pays

After your death, your personal possessions, as well as any money you have in bank accounts, will be passed on to your survivors. In some cases, survivors pay estate tax on the money they inherit. But inheritance tax laws have changed over the years, and often heirs don’t even owe money on the assets their loved ones pass on. Here’s what you need to know about inheritance tax as you work on your estate planning.

Stephanie Faris

Stephanie Faris

Published October 29th, 2021

Table of Contents

Key Takeaways

Federal taxes typically apply to high-dollar estates, thanks to an IRS exemption.

For 2021, estates worth less than $11.7 million won’t be subject to estate taxes on those assets.

Estates may still owe state taxes, as well as taxes on income that wasn’t taxed before the death of the asset holder.

It’s difficult to go through life without accumulating some combination of savings, valuables, and personal mementos. After your death, your personal possessions, as well as any money you have in bank accounts, will be passed on to your survivors.

In some cases, survivors pay estate tax on the money they inherit. But inheritance tax laws have changed over the years, and often heirs don’t even owe money on the assets their loved ones pass on. Here’s what you need to know about inheritance tax as you work on your estate planning.

What is Estate Tax?

As the name implies, the estate tax definition is simply a tax the IRS levies on assets when they pass to survivors. If you’ve inherited assets from an estate, you’ll claim the fair market value of all those assets at tax time and, if taxes apply to what you’ve inherited, you’ll be responsible for remitting that amount to the IRS.

But as you’re determining what is estate tax, it’s also important to understand you might not even owe money on what you’ve inherited. There’s an exemption that applies, and chances are, that exemption means you might not owe anything at all.

Do I Have to Pay Taxes on an Estate?

Whether you call it a death tax, an estate tax, or an inheritance tax, it’s important to pay attention to the IRS requirements specific to the tax year in question. If you inherited the funds in 2020, you’ll follow the regulations specific to federal inheritance tax 2020. For 2021 inheritances, follow the laws for that year.

The biggest thing to pay attention to is the exemption. For 2020 inheritances, the estate tax exemption 2020 is $11,580,000, which means if the assets you inherited are worth $11.58 million or lower, you’ll owe nothing on the assets themselves. For 2021 inheritances, the estate tax exemption 2021 has increased to $11.7 million.

What Assets Are Subject to Estate Taxes?

Any items you receive from a deceased person are subject to the federal estate tax. This includes money in bank accounts, outstanding wages, investments, homes, automobiles, and personal property.

In most cases, you won’t pay taxes on the assets you inherit. Both the federal estate tax exemption 2020 and the federal estate tax exemption 2021 are so high, that only the wealthiest estates will require a tax filing.

That said, you will owe taxes on any part of the estate that would have been taxed if the deceased person had lived to file. You’ll owe state and federal taxes on wages, dividends, and property that’s subject to local property taxes. Look up property tax by state 2020 or 2021 to calculate what you’ll owe.

What Is the Estate Tax Rate?

The estate tax rate on taxes that exceed the 2021 estate tax exemption ranges between 18 percent and 40 percent, depending on the amount. Form 706 helps you calculate the fair market value of the assets you’ve inherited and any tax you might owe on some or all of those assets.

If you do owe taxes on an inheritance, the below table demonstrates the inheritance tax rate for 2021.

Taxable income amount Tax rate $0-$10,000 18 percent on taxable total $10,001-$20,000 $1,800 + 20 percent on taxable total $20,001-$40,000 $3,800 + 22 percent on taxable total $40,001-$60,000 $8,200 + 24 percent on taxable total $60,001-$80,000 $13,000 + 26 percent on taxable total $80,001-$100,000 $18,200 + 28 percent on taxable total $100,001-$150,000 $23,800 + 30 percent on taxable total $150,001-$250,000 $38,800 + 32 percent on taxable total $250,001-$500,000 $70,800 + 34 percent on taxable total $500,001-$750,000 $155,800 + 37 percent on taxable total $750,001-$1 million $248,300 + 39 percent on taxable total $1 million and over $345,800 + 40 percent on taxable total

Which States Have an Estate Tax?

The inheritance tax IRS officials impose has nothing to do with state estate taxes. Some states impose estate taxes, while some impose inheritance tax.

Both estate and inheritance tax: Maryland

Estate tax: Connecticut District of Columbia Illinois Maine Massachusetts Minnesota New York Oregon Rhode Island Vermont Washington Inheritance tax: Iowa Kentucky Nebraska New Jersey Pennsylvania

Estate Tax vs Inheritance Tax: What’s the Difference?

Although the terms may be used interchangeably, estate and inheritance tax are two different things. At the federal level, it’s called an estate tax, complete with an estate tax exemption each year.

Inheritance taxes are a state thing, and currently six states impose an inheritance tax. But some states also impose an estate tax that’s in addition to the federal estate tax. It might be applied regardless of the current estate tax exemption. The biggest difference between the two is who pays the tax. Estate taxes are paid out of the estate, while the burden of paying inheritance taxes falls on the person who inherited the assets.

How to Reduce or Avoid Federal Estate Tax

Wealthier taxpayers can help reduce the tax burden heirs will face. This starts with first using an estate tax calculator to determine what the liability will be. You can then give away assets or set up a trust that isn’t subject to the taxes. In some cases, a family limited partnership can also help reduce tax liability on an estate.

Final Thoughts

As you’re doing your estate planning, pay close attention to the current exemption rates. The 2020 estate tax exemption might be different from what that exemption is today. The best way to ensure your loved ones won’t have a tax burden is to work with a certified financial planner as you work on your estate planning.


Share this advice


Stephanie Faris

Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.

Estate Planning Guide

Intro to Estate Planning


Wills


Trusts


Divorce Considerations For Retirement


Estate Settlement

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Estate Planning

Estate Tax: Definition, Tax Rates and Who Pays

After your death, your personal possessions, as well as any money you have in bank accounts, will be passed on to your survivors. In some cases, survivors pay estate tax on the money they inherit. But inheritance tax laws have changed over the years, and often heirs don’t even owe money on the assets their loved ones pass on. Here’s what you need to know about inheritance tax as you work on your estate planning.

Stephanie Faris

Stephanie Faris

Published October 29th, 2021

Table of Contents

Key Takeaways

Federal taxes typically apply to high-dollar estates, thanks to an IRS exemption.

For 2021, estates worth less than $11.7 million won’t be subject to estate taxes on those assets.

Estates may still owe state taxes, as well as taxes on income that wasn’t taxed before the death of the asset holder.

It’s difficult to go through life without accumulating some combination of savings, valuables, and personal mementos. After your death, your personal possessions, as well as any money you have in bank accounts, will be passed on to your survivors.

In some cases, survivors pay estate tax on the money they inherit. But inheritance tax laws have changed over the years, and often heirs don’t even owe money on the assets their loved ones pass on. Here’s what you need to know about inheritance tax as you work on your estate planning.

What is Estate Tax?

As the name implies, the estate tax definition is simply a tax the IRS levies on assets when they pass to survivors. If you’ve inherited assets from an estate, you’ll claim the fair market value of all those assets at tax time and, if taxes apply to what you’ve inherited, you’ll be responsible for remitting that amount to the IRS.

But as you’re determining what is estate tax, it’s also important to understand you might not even owe money on what you’ve inherited. There’s an exemption that applies, and chances are, that exemption means you might not owe anything at all.

Do I Have to Pay Taxes on an Estate?

Whether you call it a death tax, an estate tax, or an inheritance tax, it’s important to pay attention to the IRS requirements specific to the tax year in question. If you inherited the funds in 2020, you’ll follow the regulations specific to federal inheritance tax 2020. For 2021 inheritances, follow the laws for that year.

The biggest thing to pay attention to is the exemption. For 2020 inheritances, the estate tax exemption 2020 is $11,580,000, which means if the assets you inherited are worth $11.58 million or lower, you’ll owe nothing on the assets themselves. For 2021 inheritances, the estate tax exemption 2021 has increased to $11.7 million.

What Assets Are Subject to Estate Taxes?

Any items you receive from a deceased person are subject to the federal estate tax. This includes money in bank accounts, outstanding wages, investments, homes, automobiles, and personal property.

In most cases, you won’t pay taxes on the assets you inherit. Both the federal estate tax exemption 2020 and the federal estate tax exemption 2021 are so high, that only the wealthiest estates will require a tax filing.

That said, you will owe taxes on any part of the estate that would have been taxed if the deceased person had lived to file. You’ll owe state and federal taxes on wages, dividends, and property that’s subject to local property taxes. Look up property tax by state 2020 or 2021 to calculate what you’ll owe.

What Is the Estate Tax Rate?

The estate tax rate on taxes that exceed the 2021 estate tax exemption ranges between 18 percent and 40 percent, depending on the amount. Form 706 helps you calculate the fair market value of the assets you’ve inherited and any tax you might owe on some or all of those assets.

If you do owe taxes on an inheritance, the below table demonstrates the inheritance tax rate for 2021.

Taxable income amount Tax rate $0-$10,000 18 percent on taxable total $10,001-$20,000 $1,800 + 20 percent on taxable total $20,001-$40,000 $3,800 + 22 percent on taxable total $40,001-$60,000 $8,200 + 24 percent on taxable total $60,001-$80,000 $13,000 + 26 percent on taxable total $80,001-$100,000 $18,200 + 28 percent on taxable total $100,001-$150,000 $23,800 + 30 percent on taxable total $150,001-$250,000 $38,800 + 32 percent on taxable total $250,001-$500,000 $70,800 + 34 percent on taxable total $500,001-$750,000 $155,800 + 37 percent on taxable total $750,001-$1 million $248,300 + 39 percent on taxable total $1 million and over $345,800 + 40 percent on taxable total

Which States Have an Estate Tax?

The inheritance tax IRS officials impose has nothing to do with state estate taxes. Some states impose estate taxes, while some impose inheritance tax.

Both estate and inheritance tax: Maryland

Estate tax: Connecticut District of Columbia Illinois Maine Massachusetts Minnesota New York Oregon Rhode Island Vermont Washington Inheritance tax: Iowa Kentucky Nebraska New Jersey Pennsylvania

Estate Tax vs Inheritance Tax: What’s the Difference?

Although the terms may be used interchangeably, estate and inheritance tax are two different things. At the federal level, it’s called an estate tax, complete with an estate tax exemption each year.

Inheritance taxes are a state thing, and currently six states impose an inheritance tax. But some states also impose an estate tax that’s in addition to the federal estate tax. It might be applied regardless of the current estate tax exemption. The biggest difference between the two is who pays the tax. Estate taxes are paid out of the estate, while the burden of paying inheritance taxes falls on the person who inherited the assets.

How to Reduce or Avoid Federal Estate Tax

Wealthier taxpayers can help reduce the tax burden heirs will face. This starts with first using an estate tax calculator to determine what the liability will be. You can then give away assets or set up a trust that isn’t subject to the taxes. In some cases, a family limited partnership can also help reduce tax liability on an estate.

Final Thoughts

As you’re doing your estate planning, pay close attention to the current exemption rates. The 2020 estate tax exemption might be different from what that exemption is today. The best way to ensure your loved ones won’t have a tax burden is to work with a certified financial planner as you work on your estate planning.

Estate Planning Guide

Intro to Estate Planning


Wills


Trusts


Divorce Considerations For Retirement


Estate Settlement


Share this advice


Stephanie Faris

Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.

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Investing involves risk and past performance is not indicative of future results. Increased spending increases the risk of depleting your savings and performance is not guaranteed. It is very important to do your own analysis before making any decisions based on your own personal circumstances.

For more information, see our Form ADV Part II and other disclosures.

© 2022 Retirable Inc. All rights reserved.

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Legal

Retirable, Inc. ('Retirable') is an SEC registered investment advisor. By using this website, you accept our Terms and Conditions and Privacy Policy. Retirable provides holistic retirement planning services, which are available only to residents of the United States. You must be at least 18 years of age to become a Retirable Premium user. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities.

Investing involves risk and past performance is not indicative of future results. Increased spending increases the risk of depleting your savings and performance is not guaranteed. It is very important to do your own analysis before making any decisions based on your own personal circumstances.

For more information, see our Form ADV Part II and other disclosures.

© 2022 Retirable Inc. All rights reserved.

We're accredited and certified by