Decoding the Estate Tax: How Does the Estate Tax Rate Function?
How does the estate tax rate work?
The estate tax in the United States is a tax on your right to transfer property at your death. The tax is levied on the total value of your estate above a certain exemption level.
The current federal estate tax exemption amount for 2022 is $12.06 million for individuals. This means if the total value of your estate is below this threshold, no federal estate tax will be due. If your estate is worth more than the exemption amount, only the value in excess of the exemption is subject to the tax, not the entire estate.
The tax rate itself is progressive, which means it increases with the value of the taxable estate. The rates range from 18% to 40%.
For example, if an individual's estate, after deductions and exemptions, is valued at $1 million over the exemption amount, the rate applied might be 39%. However, if the estate is just $10,000 over the exemption amount, then the rate might be 18%.
Married couples can effectively double their exemption by using a legal arrangement known as estate tax portability. Upon the death of the first spouse, the executor of the estate can transfer any unused exemption to the surviving spouse, allowing for a greater exemption when the second partner passes away.
It’s very important to note however, that estate laws can vary widely by state, and a number of states also impose their own separate estate or inheritance taxes, some with much lower exemption levels than the federal estate tax. Always consult with a professional advisor on estate planning.
Also, note that estate tax laws and thresholds can change year to year based on the legislation. Always check the current rules or consult with a tax advisor for up-to-date information.