What is the current estate tax limit, rate, and exemption?

The inheritance tax is a tax on an individual’s right to transfer property after death. To determine the amount due, fair market values of all the deceased’s assets are collected up to the date of death.

Changes in Inheritance Tax Over Time

The amount through which an inheritance can pass before facing taxes is known as the “lifetime gift tax exclusion.” The table below shows how the lifetime gift tax exclusion has grown between 2000 and 2023. It also shows that the largest jump occurred in 2018 after the implementation of the Tax Cuts and Jobs Act (TCJA).

Inheritance Tax is Related to the Lifetime Gift Tax Exclusion

The lifetime gift tax exclusion often comes in the context of inheritance and bequests, but this is not the only exception to this exclusion. For example, you can give someone $16,000 in a year without needing to report the gift. Amounts above that must be reported and count against the lifetime exclusion, but you are not obligated to pay taxes on those amounts. If you are married, you and your partner can combine your exclusions.

Inheritance Tax Rate Varies by Amount

You may have read that the federal inheritance tax rate is 40%. However, this is not the whole story. This 40% rate is the highest tax rate and only applies to families that leave behind more than one million dollars after counting the lifetime gift tax exclusion. The lowest tax rate, for estates valued just above the exclusion threshold, is 18%.

Benefits of Using the Lifetime Gift Tax Exclusion Early

Some families may find it makes sense to start using the lifetime gift tax exclusion before their deaths and leaving behind their entire estate. This can give the assets time to grow through profits, interest, and rents within their portfolio. You may also be able to take advantage of liquidity discounts in family limited partnerships, for example, or reduced family loans at the lowest treasury rate applied. If done correctly, the family can reduce the tax burden while building wealth to cover any taxes that may be due at the time of inheritance transfer.

State Inheritance Taxes Differ

So far, we have dealt with the federal inheritance tax. However, some individual states impose inheritance and/or estate taxes as well.

The following states and entities have an inheritance tax: Washington, Oregon, Minnesota, Illinois, New York, Massachusetts, Rhode Island, Connecticut, Maine, Maryland, Vermont, Washington D.C.

Some states, on the other hand, have an estate tax. It is similar to the inheritance tax, but the burden typically falls on the person receiving the money rather than the estate itself.

The following states have an estate tax: Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, Maryland.

Check with the regulations set by your local and state government to find out the laws regarding inheritance and estate taxes.

Frequently Asked Questions (FAQs)

What is the federal inheritance tax for 2022?

The lowest federal inheritance tax rate for 2022 is 18%, gradually increasing up to 40% for taxable estates exceeding one million dollars. Please note that these rates apply to amounts exceeding the lifetime inheritance tax exclusion of $12.06 million. The exclusion limit rises to $12.92 million for 2023.

What is the minimum federal inheritance tax?

For 2022, the minimum federal inheritance tax is $12.06 million. The limit rises to $12.92 million in 2023.

Source: https://www.thebalancemoney.com/what-is-the-current-estate-tax-limit-rate-and-exemption-357481