How to Calculate Estate Tax
The federal estate tax is a tax on the transfer of property from a deceased person. A very small percent of all families ever have to pay the estate tax, but, for those who do, the filing is due within nine months of the date of death. The estate tax is so controversial, sometimes known as "the death tax," that legislators have frequently changed the applicable rates and exclusions. This makes it necessary to confirm the precise figures for the year of death.
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Instructions
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Determine gross estate. The gross estate of a decedent includes almost all assets in which they had some interest at the time of their death. The gross estate includes assets that were not subject to probate, such as those held in living trusts. When determining the value of the gross estate, the current fair market value is used, not the price that was paid for the assets.
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Identify the applicable exclusion amount. Equal to the estate value that would create a tax liability in the amount of the unified credit, the applicable exclusion creates the threshold at which an actual estate tax liability begins. In 2009, the exclusion rose to $3.5 million, but this figure is subject to annual change.
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Calculate taxable estate. If the value of the gross estate exceeds the exclusion amount for the year of death, IRS Form 706 must be filed. The difference between the gross estate and the exclusion amount is the taxable estate.
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Identify deductions. From the gross estate can be deducted certain expenses, transfers or losses. The most important is the marital deduction, which exempts all property that passes outright to the surviving spouse of the estate. Assets donated to a qualifying charity, debts paid from the estate, administrative costs of the estate and any losses realized during administration can all be deducted from the gross estate. These are entered in total on Part II, line 2 of Form 706.
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Add in adjusted taxable gifts. The estate tax is designed to include taxable gifts made during the decedent's lifetime. On Form 706 all the decedent's taxable gifts made after 1976 are added to the gross estate. This is then adjusted by lowering the total estate tax by the amount of gift taxes that would have been due if the gifts had all been made in the year of death. In order to complete this part of the form correctly, complete tax records of the decedent are necessary.
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Tips & Warnings
If the gross estate is less than the exclusion amount only because of deductions, you must file Form 706 even though no tax will be due. Several tax brackets with varying marginal rates are applied to estates that exceed the exclusion. If the decedent dies with a valid will, a copy must be attached to Form 706. A six month extension for estate tax filing can be requested if necessary.
In addition to the federal estate tax, some states also levy an estate tax, usually with the same or similar criteria as the federal tax. The state estate tax can be deducted on the federal estate tax form.
