FBP - Certified Public Accountants

Federal Estate Tax

Written by Layne Bodily

March 5, 2023

Estate tax return

This is the second installment in a three-part series on Estate Planning.

The federal estate tax is one of the most complex and controversial taxes in the United States. This tax is imposed on the transfers of property at death, and it can have a significant impact on the financial planning of wealthy individuals and their families.

Exemption Amount

The estate tax is a tax on your right to transfer property at your death. The estate tax applies to both real and personal property and is currently imposed at a rate between 18% and 40%. There is, however, an exemption amount that shields a certain amount of the value of your estate from taxation. For example, in 2022, the first $12.06 million of your estate is exempt from taxation. This means that only estates valued at more than $12.06 million are subject to the federal estate tax.

Current Limit Sunsets in 2026

The Tax Cuts and Jobs Act of 2017 increased the federal estate tax exemption to $11.2 million per person ($22.4 million per married couple) in 2018. The exemption is currently scheduled to sunset after 2025, returning to $5 million per person ($10 million per married couple) in 2026 with a yearly cost-of-living adjustment. As stated above, the 2022 exemption is $12.06 million.

Take Advantage of the Higher Amounts Now

Under current law, the estate tax applies to transfers of property at death. The tax is imposed on the value of the decedent’s taxable estate, which generally consists of all property interests owned at death, less amounts that are properly allowable as deductions. For 2022, the first $12.06 million of a decedent’s taxable estate is exempt from tax (this amount is indexed for inflation in future years). Any remaining taxable estate is subject to tax ranging from 18%-40%.

In order to take advantage of the higher amounts that are exempt from estate taxes, you may want to consider gifting appreciating assets such as stocks or real estate. By gifting these assets now, you can avoid having them be subject to estate taxes in the future. Additionally, you can still retain control over these assets by setting up a trust. This can be an effective way to minimize your overall tax liability while still providing for your loved ones.

Understanding “Step Up in Basis”

In most cases, assets including real estate, stocks, bonds, etc., are worth more at the owner’s time of death than when they were purchased. The IRS allows the “cost basis” of inherited property to be increased, or stepped up, to the fair market value at the time of death.

This means that the heir(s) will pay less in capital gains if they choose to sell the asset later. The step up in basis takes place at the time of inheritance and should be done by the executor of the estate.

Due to the complexity of Federal Estate Taxes, it is always best to consult with your accountant and potentially an estate lawyer. We are happy to help you with your estate planning. Contact us to learn more.

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