The exclusion for tax year 2022 is $12.06 million. For 2023, the exclusion amount is $12.92 million. Any funds after that will be taxed as they pass on to heirs, at a rate that varies by the amount being passed on. Learn how the estate tax has changed over time, the impact it has, and how it can impact you at tax time.
Changes in Estate Tax Over Time
The amount an estate can pass on before facing taxes is known as the “lifetime gift tax exemption.” The chart below shows how the lifetime gift tax exemption grew between 2000 and 2023. As you can see, the biggest leap occurred in 2018, after the Tax Cuts and Jobs Act (TCJA) took effect.
The Estate Tax Is Tied to the Lifetime Gift Tax Exemption
The lifetime gift tax exemption most commonly comes into play in scenarios of estate and inheritance, but that isn’t the exemption’s only application. If you want to give more than the annual exemption amount, you can pay the tax on the gift, or you can use part of your lifetime gift tax exclusion allowance. Let’s say you and your spouse gave your child $100,000 in 2022. Of the total gift, $68,000 would be subject to the gift tax. However, you could include it as part of your lifetime gift tax exclusion allowance and avoid paying any taxes.
Estate Tax Rate Varies by Amount
You may have read that the federal estate tax rate is 40%. However, that isn’t the whole story. That 40% rate is the top tax rate, and it only applies to families leaving behind more than $1 million—after accounting for the lifetime gift tax exclusion. The lowest tax rate, for estates valued just beyond the exclusion amount, is 18%.
Benefits To Using Lifetime Gift Tax Exclusion Early
Some families may find that it makes sense to begin taking lifetime gift tax exclusions well before they die and bequeath their entire estate. Doing so can give the assets time to grow through dividends, interest, and rents within their portfolio. You may also be able to make use of liquidity discounts in family limited partnerships, for example, or discounted family loans at the lowest applicable Treasury rate. Done correctly, a family can minimize the tax burden while building wealth to pay off any taxes that may be due at the time of the estate transfer.
State Estate Taxes Vary
The figures so far have dealt with the federal estate tax. However, some individual states impose estate and/or inheritance tax, as well. The following states and entities have an estate tax in place:
WashingtonOregonMinnesotaIllinoisNew YorkMassachusettsRhode IslandConnecticutMaineMarylandVermontWashington, D.C.
Some states, on the other hand, have an inheritance tax in place. It is similar to an estate tax, but the burden usually falls on the one receiving the money rather than upon the estate itself. The following states have an inheritance tax:
NebraskaIowaKentuckyPennsylvaniaNew JerseyMaryland
Check with your state and local government to find out what regulations they have in place regarding estate and inheritance taxes.
