Administered on the federal level, the estate tax is imposed on a deceased person’s assets prior to transfer to heirs. Knowing this, many estates will not need to worry about taxation under the current tax law. Currently, the minimum amount that will be taxed for individual estates during 2023 is $12.92 million and $25.84 million for couples.
With the tax making a significant impact on beneficiaries, it is a good idea to include estate tax planning in the estate plan if your estate will be at the minimum.
Federal Estate Tax Rates
To put it in simpler terms, if an estate’s value is above the $12.92 million minimum for 2023, the taxable amount will be the total that exceeds the minimum. The 2023 estate tax also includes a marginal rate and base tax. Under the new tax exemptions, all amounts above $1 million have a rate that maxes at 40%.
A good example of this is if an estate has a value of $13.36 million, then the estate tax will be $440,000, which is the 40% of the excess past the minimum. For the tax tier that applies, a total of $135,400 would be assessed for the base rate.
States Imposing Estate Taxes
An estate can also be affected by the state in which it is located and can experience a state-level estate tax. For 2023, the states that currently levy estate tax include Oregon, Washington, Illinois, Minnesota, Maryland, Connecticut, Vermont, New York, Hawaii, Massachusetts, Rhode Island, Washington DC, and Maine. Unfortunately, an estate that is above the minimum exemption could be double taxed at various amounts. For instance, in Oregon and Massachusetts estate tax is at a minimum of $1 million, while Connecticut has a minimum of $9.1 million. Plus, there is a difference in tax rates. To get the official rate, you should consult with your state for applicable tax exemptions and liabilities.
Understanding the 2023 Estate Tax Exemption
The 2023 estate tax exemption is an IRS tool used to avoid being double taxed. When an estate generates income after a death, the amount earned will not be taxed if the estate has already been taxed. The income earned after an individual is deceased is known as the Income in Respect of Decedent (IRD).
If an estate is sizable, there is a chance for a double tax to occur federally in regards to estate and income taxes that apply to the IRD. Having the estate tax exemption is able to have a deduction made that equals the tax that was paid to cover an IRD, which will be from the income that is also taxable. Doing this allows the prevention of being double taxed.
Most Americans will unlikely have an estate that will be taxed under the latest estate tax limit. Regardless, the topic of estate tax will always be a discussion point as the law could easily change again. If you are unsure of how your estate is affected by the latest estate tax exemptions, get in touch today to find out.