In certain instances – especially if you have amassed an extremely large estate – you’ll have to pay an estate tax when you transfer real property or other monetary assets to your heirs when you die.
Estate taxes are levied on the gross fair market value of the assets that comprise your estate.1 Assets that may contribute to the Gross Estate tax include:
- Real estate
- Securities
- Cash
- Annuities
- Business interests
- Insurance
- Digital assets
Just because there’s a federal estate tax, don’t think you have to start hiding piles of cash under your mattress and in coffee cans to avoid taxation. There’s a significant exemption that excludes many estates from having to pay the federal Gross Estate tax. However, certain states impose an estate tax.
Here’s a look at federal estate tax exemptions, as well as the 12 states that levy an estate tax.
Federal Estate Tax Exemption Limits
As noted, many estates won’t have to worry about paying the federal estate tax because the exemption for 2022 is $12.06 million. This figure will rise to $12.92 million in 2023.
|
Year |
Estate tax imposed when amount exceeds: |
|
2021 |
$11,700,000 |
|
2022 |
$12,060,000 |
|
2023 |
$12.920,000 |
Source: Internal Revenue Service
The exemption is adjusted each year to account for inflation. A decade ago, the estate tax exemption was $5.12 million, less than half of what it is today. This sharp rise in exemption amounts was brought about by the Tax Cuts and Jobs Act of 2017. The tax reform law basically doubled the exemption amount beginning in 2018 and ending in 2025. In 2026, the federal estate tax exemption is scheduled to revert back to $5 million.2
Another thing to note is that the estate tax exemption amount doubles for married couples, as shown below:
|
Year |
Estate tax imposed on married couples when amount exceeds: |
|
2021 |
$23,400,000 |
|
2022 |
$24,120,000 |
|
2023 |
$25,840,000 |
Source: Internal Revenue Service
Only the most sizable estates will pay the federal estate tax. In 2021, there were 2,584 estates that paid a total of $18.4 billion in estate taxes. The prior year, 1,275 estates paid $9.3 billion in estate taxes.3
States That Impose an Estate Tax
The District of Columbia and 12 states levy an estate tax. The table below shows exclusion amounts for 2022 and tax rates.4
|
State |
Exclusion Amount, 2022 |
Tax Rate |
|
Connecticut |
$9.1 million |
10.8%-12% |
|
District of Columbia |
$4 million |
11.2%-16% |
|
Hawaii |
$5.5 million |
10%-20% |
|
Illinois |
$4 million |
.8%-16% |
|
Maine |
$5.8 million |
8%-12% |
|
Maryland |
$5 million |
.8%-16% |
|
Massachusetts |
$1 million |
.8%-16% |
|
Minnesota |
$3 million |
13%-16% |
|
New York |
$6.1 million |
3.06%-16% |
|
Oregon |
$1 million |
10%-16% |
|
Rhode Island |
$1.7 million |
.8%-16% |
|
Vermont |
$5 million |
16% |
|
Washington |
$2.2 million |
10%-20% |
Source: Tax Foundation
Putting it all Together
The majority of U.S. citizens won’t have to worry about paying estate taxes upon their death due to high exemption amounts – however, those limits are scheduled to be cut in half starting in 2026.
Taxpayers with large estates and those living in states that impose an estate tax may have to pay some form of estate tax and file a Form 706, which is used to calculate the estate tax that’s imposed under Internal Revenue Code, Chapter 11. If you are concerned about the potential effects of federal or state-level estate taxation, consult with a certified financial planner or estate planner to discuss your particular situation.
1Estate Tax, IRS, https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
2Estate and Gift Tax FAQs, IRS, https://www.irs.gov/newsroom/estate-and-gift-tax-faqs
3SOI Tax Stats – Estate Tax Filing Year Tables, Table 5, Years 2021 and 2020, IRS, https://www.irs.gov/statistics/soi-tax-stats-estate-tax-filing-year-tables
4Does Your State Have an Estate or Inheritance Tax? Tax Foundation, https://taxfoundation.org/state-estate-tax-inheritance-tax-2022/
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
