How Do Estate Taxes Work

Estate tax is what the federal government collects as a fee when someone dies, those collected assets are then transferred to another person or set of people that their will specifies. However, married couples are not required to pay an estate tax since they are considered to obtain equal ownership; More often than not, assets are typically stated to be given to the last surviving parent’s progeny. There’s also a federal gift tax in place to prevent those who try to evade the estate tax by transferring large sums of wealth from the aging estate owner; However, there is a varying amount, which is dependent on the determination of an estate’s value, that can be transferred from the estate’s aging owner without having to incur with estate or federal gift taxes. When an asset is left to a deceased’s spouse or a federally recognized charity, then the estate tax is typically not applied.

The estate tax is similar to the income tax rate. To determine the tax rate, it’s 18% for estates considered low value and 45% for estates that are valued at 2 million and higher. To determine the value of someone estate, the federal government takes into account the summation of all assets including annuities, life insurance money, monetary holdings, investments, and real estate. For any estate that’s valued below two million, the estate tax is reduced to zero under unified credit. There are some states where inheritance tax is combined with the estate tax. There can be deductions placed on estate tax that includes, but not limited to; Certain charitable contributions, funeral expenses, claims against the estate, certain belongings left to the surviving spouse, inheritances of estates in the District of Columbia, and administration expenses. If the surviving spouse is the one that’s receiving the estate, the tax is waived, as long as both the deceased and the spouse are US citizens. In order to receive an unlimited marital deduction, there’s Qualified Domestic Trust.

There are other considerations that are taken when it comes to determining the rate of the estate tax. The federal gift tax code states that up

to $12,000 ($24,000 for married couples) can be gifted to an unlimited number of beneficiaries up to $345,000 each year. For people and married couples who utilize the gift allowance, they can possible reduce the value of their estate. When an estate has been deemed exempted fro the tax, it’s paid by either the executor or the person left in possession of the deceased’s property. That same person is also then accountable for filing a 706 form return with the IRS (Internal Revenue Service). If the deceased’s spouse would like to claim an estate or gift tax exemption, the Form 706 must also be filed.

As mentioned, an estate of a certain amount can be exempted. Estates that exceed the limits set be the federal government have to pay an estate tax. For example, an estate that’s valued at $3.5 million and includes two beneficiaries (receiving an equal amount of the deceased’s state) would equate to an allowable credit of two million for the first year, putting the taxable portion at $1.5 million which would mean $690,000 that would have to be paid in taxes; That means each of the beneficiaries will receive a million dollars of untaxed inheritance.

The estate tax that is given to the deceased’s spouse is also dependent on their citizenship. United States citizens who do not have a citizen spouse are not given the same marital deduction benefits as two citizens who are married. Married couples, who are not both citizens, are also not eligible to receive an estate tax exemption.

The estate tax is controversial as the tax is placed on money that has already been taxed before. The estate tax comes under continuous political debate which was phased out during George W. Bush’s presidency and then adjusted under the Obama administration. The debate with the estate tax basically comes down to one side who opposes placing any tax on inheritance while the other side claims that estate tax is legitimate and a necessary tax; However, both sides don’t discuss much about what the rates should be.

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Category: Taxes

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