Estate Tax: Definition, Tax Rates and Who Pays in 2022-2023
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What is an estate tax?
The estate tax, sometimes also called the "death tax," is a tax that's levied on a deceased person's assets. In 2023, the federal estate tax ranges from rates of 18% to 40% and generally only applies to assets over $12.92 million. In 2022, the exemption was $12.06 million.
Some states also have estate taxes. So, even if you qualify for the federal estate tax exemption, you may still remain responsible for a state-level tax. You can find more details on states that apply this levy below.
How does an estate tax work?
The federal estate tax is assessed on the current fair market value of the assets. In other words, the tax is calculated based on what the assets are worth today, not the original value at the time of purchase by the deceased.
Assets inherited by the surviving spouse are generally not subject to the federal estate tax because of the unlimited marital deduction.
IRS Form 706 also has the details on exactly which assets count in the calculations for the federal estate tax, how to find their value and how to figure the tax. But in general, you figure the tax by applying the rates below to the amount of the estate that's subject to tax. See a qualified tax professional if you have questions.
Do I have to pay taxes on an estate?
Probably not. The IRS exempts estates of less than $12.06 million from the tax in 2022 and $12.92 million in 2023, so few people actually end up paying it. Plus, that exemption is per person, so a married couple could double it. The IRS taxes estates above that threshold at rates of up to 40%.
Estate tax rates
Tax rate | Taxable amount | Tax owed |
|---|---|---|
18% | $0 to $10,000. | 18% of taxable amount. |
20% | $10,001 to $20,000. | $1,800 plus 20% of the amount over $10,000. |
22% | $20,001 to $40,000. | $3,800 plus 22% of the amount over $20,000. |
24% | $40,001 to $60,000. | $8,200 plus 24% of the amount over $40,000. |
26% | $60,001 to $80,000. | $13,000 plus 26% of the amount over $60,000. |
28% | $80,001 to $100,000. | $18,200 plus 28% of the amount over $80,000. |
30% | $100,001 to $150,000. | $23,800 plus 30% of the amount over $100,000. |
32% | $150,001 to $250,000. | $38,800 plus 32% of the amount over $150,000. |
34% | $250,001 to $500,000. | $70,800 plus 34% of the amount over $250,000. |
37% | $500,001 to $750,000. | $155,800 plus 37% of the amount over $500,000. |
39% | $750,001 to $1,000,000. | $248,300 plus 39% of the amount over $750,000. |
40% | $1,000,001 and up. | $345,800 plus 40% of the amount over $1,000,000. |
Source: Internal Revenue Service
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Which states have an estate tax?
Several states and the District of Columbia have an estate tax. Many have lower asset thresholds than the federal government. Each state’s exclusion amount is in the table below.
If you live in a state with an estate tax, the good news is that (generally speaking) your estate tax bill is subtracted from the value of your taxable estate before you calculate what you might owe the IRS.
States with an estate tax
State | Exclusion amount (2022) |
|---|---|
Connecticut | $9.1 million. |
District of Columbia | $4.25 million. |
Hawaii | $5.49 million. |
Illinois | $4 million. |
Maine | $6.01 million |
Maryland | $5 million. |
Massachusetts | $1 million. |
Minnesota | $3 million. |
New York | $6.11 million. |
Oregon | $1 million. |
Rhode Island | $1.64 million. |
Vermont | $5 million. |
Washington | $2.19 million. |
What is the difference between an inheritance tax and an estate tax?
A few states have an inheritance tax, which is different from an estate tax. Inheritance taxes are paid by heirs or inheritors generally upon receiving the inherited assets. An estate tax, on the other hand, is a tax levied on the entire taxable estate itself. Executors of the estate use Form 706 to figure the amount owed.
Six states have an inheritance tax, and one collects both estate and inheritance taxes.
Inheritance tax rates often depend on the heir’s relationship to the deceased. A surviving spouse is usually exempt from state inheritance tax. Some states tax a deceased person's children but at a low rate. More distant relatives or heirs who aren't related to the deceased usually face the highest inheritance tax rates.
How to reduce or avoid the federal estate tax
If you want to reduce your estate taxes before you die, there are some tactics you might use to protect your property. They include:
Spending your assets. If you're not afraid of running out of money before you die, enjoy your wealth.
Spreading your assets. You could give away part of your estate as gifts to loved ones while you're still around. Many states don't tax gifts. (Learn how the gift tax works.)
Giving away your assets. If you leave property to a qualifying charity, it is deductible from the gross estate.
Shielding your assets in a trust. Properly created irrevocable trusts could provide a way to legally shelter some of your assets from state and federal estate tax.
Moving to a more favorable tax environment. Since most states don't have an estate tax or inheritance tax, you have many relocation options.
If you inherit or bequeath something, watch out for capital gains tax
Even if an inheritance isn't taxed when your heirs receive it, any subsequent earnings or income that it produces may be considered taxable capital gains at the federal and state levels.
If your heirs sell an asset they inherited, any profit could be taxed at the federal level as either a long-term or short-term capital gain, depending on when they dispose of the property.
If you do give your heirs a bequest, especially a sizable one, it's a good idea for them to talk with a professional who specializes in estate taxes about the best ways to reduce capital gains tax.
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