Federal Inheritance Tax Limits
Inheritance tax, called estate tax at the federal level, is a tax liability on the taxable portion of an estate that arises on the decedent’s death. The estate, not the beneficiaries, is responsible for paying these taxes prior to division of the assets. There are limits to the tax imposition, at least at the federal level, and further available credits that can additionally reduce an estate’s tax liability.
It is worth noting that the term “inheritance tax” historically refers to state-imposed death taxes, while “estate tax” refers to federally imposed death taxes.
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The tax table for federal inheritance tax rate and limits is predetermined but changes every calendar year. Each year, the “exclusion amount” increases, while the taxable rate decreases. At the end of the tax table’s cycle, the federal inheritance tax is repealed for one full calendar year, at which time a new tax table is developed and begins its rotation the succeeding year.
Exclusion Amount
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Each year, the Internal Revenue Service provides the exclusion amount for federal estate taxes. This number is the total net worth of the estate that is excluded from estate tax liability. Any amount that exceeds the exclusion amount will be subjected to that year’s estate tax rate.
For example, let's say your estate’s net worth totals $1.5 million, and the exclusion amount for the year in which you pass is $1 million. Your executor would subtract the exclusion amount--$1 million--from your estate’s net worth, leaving $500,000. This is the amount of your estate that will be subject to federal taxes.
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Ineligible Estates
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Many estates are determined to be ineligible for federal estate taxes. This happens when that year’s exclusion amount matches or exceeds the total net worth of the estate. If your estate’s total net worth is less than or equal to the exclusion amount for the year in which you pass, your estate will not owe federal estate taxes. Note that your estate still may be subject to state inheritance taxes if your state of residency imposes them.
Estate Tax Table
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Just like the exclusion amount, the federal estate tax table changes every calendar year. The IRS typically releases the estate tax table in years of ten; for example, in the year 2000, the IRS releases the tax rates for the years 2000 through 2010, when the estate tax was repealed. Contact the IRS or visit its website (see Resources) to review the tax table and exclusion amount for the applicable year.
Repealed Estate Tax
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Every 10 years, the federal estate tax is repealed. This means that the estates of all decedents who pass during the repealed year will not be subject to any federal estate taxes (although, again, state inheritance taxes may still apply). Estate taxes are repealed for 1990, 2000, and 2010, 2020, 2030 and so on. To review the next year in which the estate tax will be repealed, visit the IRS website.
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References
- "United States Code, 2006, V. 17, Title 26, Internal Revenue Code, Sections 581-5891"; U.S. Law Revision Counsel; 2008
Resources
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