What Is Federal Estate Tax?

In 2023, the federal estate tax is a tax on the transfer of property from a deceased person to their heirs and beneficiaries. This tax is sometimes referred to as the “death tax” and is imposed by the federal government when a person passes away. It is important to note that the federal estate tax is different from the inheritance tax, which is a tax imposed by individual states.

The federal estate tax is based on the value of the estate, which is the total of the deceased’s assets minus any debts or liabilities. It is a progressive tax, meaning that the rate increases as the value of the estate increases. For example, the first $11.58 million of the estate is exempt from the tax, but any amount over this is taxed at a rate of 40%.

Who is Subject to the Federal Estate Tax?

In 2023, the federal estate tax applies to estates with a value over the current exemption amount, which is $11.58 million per person. This means that if the deceased’s estate is worth more than $11.58 million, it may be subject to the federal estate tax. It is important to note that this tax is only applicable to estates that are subject to probate, which means that assets like life insurance policies, IRAs, and joint accounts may be exempt from this tax.

In addition, the federal estate tax only applies to the estates of U.S. citizens and residents. Non-residents are exempt from this tax.

How is the Federal Estate Tax Calculated?

The federal estate tax is calculated by subtracting the applicable exemption amount from the total value of the estate. The amount that is left will be subject to the federal estate tax. The tax rate is progressive, which means that the higher the value of the estate, the higher the tax rate.

The federal estate tax is also subject to deductions, which can reduce the amount of tax that is owed. For example, the deceased’s debts, funeral expenses, and charitable donations may be deducted from the taxable amount.

How Can I Avoid Paying the Federal Estate Tax?

In 2023, there are a few ways to avoid paying the federal estate tax. The first is to plan ahead and ensure that the estate is below the exemption amount. This can be done by giving away assets or transferring them to trusts before the person passes away.

Another way to avoid the tax is to use the annual gift tax exclusion. This exemption allows individuals to give away up to $15,000 per person per year without having to pay the federal estate tax. Finally, spouses can transfer any amount of assets tax-free, as long as the assets are transferred to the surviving spouse.

How is the Federal Estate Tax Paid?

The federal estate tax is typically paid by the executor of the estate. The executor must file Form 706 within nine months of the date of death in order to calculate the amount of tax that is owed. The executor then pays the tax using the IRS’s Electronic Federal Tax Payment System.

Once the tax has been paid, the executor must file Form 706-A within one year of the date of death in order to receive a refund of any overpayment of the estate tax.

What Are the Penalties for Not Paying the Federal Estate Tax?

If the federal estate tax is not paid on time, the executor may be subject to late payment penalties. These penalties can include interest on the unpaid tax, as well as a fine of up to 25% of the unpaid amount. In addition, if the executor knowingly fails to pay the tax, they may also be subject to criminal penalties.

Can I Appeal the Amount of Federal Estate Tax Owed?

If the executor believes that the amount of federal estate tax owed is incorrect, they can file a petition for redetermination with the IRS. This petition must be filed within 90 days of the date of the original notice of the tax due. The executor must provide evidence to support their claim and the IRS will then review the case and make a determination.

What Other Taxes Might I Have to Pay?

In addition to the federal estate tax, the estate may also be subject to other taxes such as the state estate tax, the generation-skipping transfer tax, and the gift tax. The estate may also be subject to income taxes if the deceased had income-producing assets. An estate planning attorney can help you understand which taxes may be applicable to your situation.

Conclusion

The federal estate tax is a tax on the transfer of property from a deceased person to their heirs and beneficiaries. This tax is imposed by the federal government and is based on the value of the estate. The current exemption amount is $11.58 million per person, which means that any estate worth more than this amount may be subject to the tax. The tax rate is progressive, meaning that the rate increases as the value of the estate increases. The executor of the estate is responsible for filing the appropriate forms and paying the tax. There are a few ways to avoid or reduce the amount of federal estate tax owed, such as giving away assets before death or using the annual gift tax exclusion. If the executor believes that the amount of tax owed is incorrect, they can file a petition for redetermination with the IRS. In addition to the federal estate tax, the estate may also be subject to other taxes such as the state estate tax and the gift tax.