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An Updated Guide To Dealing With Estate Tax

Did you know that the death tax is also called the estate tax? Did you even know there was an estate tax? If not, you’re in the right place. We’ll take you through what is an estate tax, state and federal estate tax, estate tax rate and estate tax vs inheritance tax.

Table of contents

Key Takeaways:...Read more

What is an estate tax?...Read more

How much is estate tax in the US?...Read more

What is estate income tax?...Read more

Does the IRS know when you inherit money?...Read more

How much can you inherit without paying federal taxes?...Read more

Do beneficiaries pay federal estate tax?...Read more

What assets are not subject to estate tax?...Read more

States with estate tax...Read more

What triggers an estate tax return?...Read more

How to file an estate income tax return?...Read more

How to avoid federal estate tax?...Read more

Who pays estate tax in Massachusetts?...Read more

The estate tax exemption “sunset” for 2026...Read more

What is the difference between inheritance tax and estate tax?...Read more

Form 706 vs 1041...Read more

Key Takeaways:

The federal estate tax exemption 2024 is $13.61 million.
Only 13 US states levy estate tax.
You can apply for an estate tax ID on the IRS website by filing Form SS-4.

What is an estate tax?

Sometimes referred to as the death tax, estate tax is a tax on the transfer of property after someone dies. Unlike the inheritance tax, which is paid by the heirs, the tax is paid by the estate itself before any assets are distributed to beneficiaries. In the US, the federal estate tax applies to estates that exceed a certain value. This means if the total value of everything you own adds up to more than this estate tax exemption amount, your estate may owe taxes before your heirs receive their inheritance. To manage your tax obligations, you will need a tax ID number for an estate. Many people hire professional tax experts to help with estate planning strategies to reduce the amount of estate tax their descendants will have to pay.

How much is estate tax in the US?

The federal estate tax rate can be quite high, starting at 18% and going up to 40% for the largest estates. Some states also have their own estate taxes with different exemption limits and rates, so it’s important to check the laws around where you live. US estate tax is based on the value of what you leave behind. Currently, estates worth more than $13.61 million ($27.22 million for a married couple or joint filers ) are subject to this tax.This is called the estate tax exemption 2024. If everything you own adds up to more than this amount, your estate might owe taxes. A tax ID number for an estate is essential when handling estate taxes. You can file Form SS-4 and get your ID number for free on the IRS website.

Infographic entitled Estate Tax Rates showing the rates for the latest tax year.

What is estate income tax?

Estate income tax is the tax on money earned by an estate after someone has passed away. This could be from interest, dividends, rental income, or any other income that the estate's assets generate. To manage this, the estate needs to file an estate income tax return using Form 1041. This estate income tax return keeps track of all the income the estate earns and figures out how much tax is owed on that income. This is different from estate tax reporting, which deals with the total value of the estate and the estate tax due based on that value. The final estate tax return is what you use to report the estate’s value and calculate the estate tax. It is usually filed by the estate administrator. So, while Form 1041 is about the income the estate earns, Form 706 is about the estate’s overall value. Both are important to ensure all tax duties are fulfilled before the estate’s assets are passed on to beneficiaries.

Does the IRS know when you inherit money?

When you inherit money, the IRS doesn’t automatically know about it. However, certain actions can alert them. If the estate is large enough to owe estate tax, the executor will file a federal estate tax return. This information can be accessed by the IRS. The death tax, or estate tax, applies to estates exceeding a certain value, with estate tax rates starting at 18% and going up to 40%. If you inherit assets like stocks or real estate and sell them, the IRS will know because you'll need to report the sale on your tax return. The same goes for inherited retirement accounts like IRAs; withdrawals from these accounts are usually taxable, and the financial institution will report these transactions to the IRS. Even though you don’t typically owe taxes on the money or property you inherit, it's important to report any income generated from these assets.

How much can you inherit without paying federal taxes?

You can inherit a significant amount without paying federal taxes. As of 2024, the estate tax exemption is $13.61 million. This means if the total value of the estate you inherit is below this estate tax exemption 2024, you won’t owe any federal estate tax. If the estate exceeds this exemption, only the amount above $13.61 million is subject to federal estate tax. For example, if you inherit an estate worth $14.20 million, only $0.59 million would be subject to the estate tax. The estate tax rate starts at 18% and can go up to 40% for the largest estates. However, most people don’t have to worry about federal estate taxes because the exemption limit is so high.

Do beneficiaries pay federal estate tax?

Beneficiaries generally do not pay federal estate tax directly. Instead, the estate itself is responsible for paying this tax before any assets are distributed. If the estate receives the exemption, the portion over the limit is subject to the estate tax rates. The executor of the estate will handle the payment of these taxes using the estate’s funds and will need to obtain a federal tax number for the estate to manage these obligations.

What assets are not subject to estate tax?

Certain assets are not subject to federal estate taxes, which can help reduce the taxable value of an estate. For example, assets that fall below the estate tax exemption amount of $13.61 million as of 2024 aren’t taxed. Life insurance policies owned by the deceased can sometimes be exempt from federal estate taxes if they are held in a properly structured irrevocable life insurance trust. Gifts given during the person’s lifetime, as long as they fall under the annual gift tax exclusion limits, are also generally not included in the estate’s value. Charitable donations are another area that’s not taxed. If the deceased left assets to a qualified charity, these assets are exempt from estate tax. Form 706 provides detailed information on which assets are included in the calculations for federal estate tax, how to determine their value, and how to calculate the amount owed.

States with estate tax

In addition to federal estate taxes, some states impose their own estate taxes. These states with estate tax have different rules, exemption amounts and tax rates compared to the federal system. For example, states like California, Texas, and Florida do not have their own estate taxes. However, states such as New York, Massachusetts and Oregon do. In New York, the estate tax exemption is $6.94 million, with rates up to 16%. Massachusetts has a lower exemption amount of $2 million and tax rates that can reach 16%. Oregon’s exemption is $1 million, and estate tax rates range from 10% to 16%. If you’re dealing with estate taxes in these states, you'll need to file an estate tax return for both state and federal taxes. The estate will also need a federal tax number for the estate to handle the federal filing and tax obligations.

What triggers an estate tax return?

An estate tax return is required when the value of an estate exceeds the federal estate tax exemption, which is $13.61 million as of 2024. If the total value of everything the deceased owned—such as real estate, investments, and personal property—goes above this amount, you’ll need to file an estate tax return. Additionally, if the deceased lived in a state with its own estate taxes, you’ll need to file a state estate tax return as well. State estate tax rates and exemption limits can differ from federal rules, so it’s important to be aware of the specific regulations in that state. Filing the final estate tax return involves reporting the value of all assets and calculating any potential estate taxes owed. This process requires a federal tax number for the estate. Working with an estate planning professional can help ensure that you are in line with both federal and state estate tax requirements. Remember that an estate income tax return reports income earned by the estate after death, like interest or dividends. An estate tax return calculates the federal estate tax owed based on the total value of the estate at the time of death.

How to file an estate income tax return?

Filing an estate income tax return might sound complex, but it’s straightforward once you know the steps. Start by collecting all the financial details related to the estate's income, like interest, dividends, rental income, and any earnings from investments or businesses. To get started with filing an estate income tax return, you’ll need to complete Form 1041. This form helps you report the estate’s income and claim any deductions. Just make sure you fill it out with accurate information from the estate’s financial records. You’ll report all the income the estate has earned and apply any deductions you’re eligible for to reduce the taxable amount. You need to submit the estate income tax return by the 15th day of the fourth month after the end of the estate’s tax year. For estates following a calendar year, this means the return is due by April 15 of the next year. If you need more time, you can file for an extension, but remember that any taxes owed still need to be paid by the original deadline to avoid penalties. Lastly, make sure to pay any taxes owed on time to dodge extra fees. And don’t forget to keep copies of all your documents related to filing the estate tax return for your records.

How to avoid federal estate tax?

Avoiding federal estate taxes involves proactive planning to reduce the taxable value of your estate. The estate tax exemption is $13.61 million. Keeping your estate’s value below this 2024 estate tax exemption can help you avoid federal estate taxes. One strategy is to use annual gift exclusions. You can give up to $18,000 per person each year without it affecting your lifetime exemption. This helps decrease the size of your estate over time. Setting up trusts is another effective method. Certain trusts, such as irrevocable life insurance trusts or charitable trusts, can remove assets from your estate and reduce its taxable value. Charitable donations made through these trusts are not subject to death tax, or estate tax. Additionally, taking advantage of the marital deduction allows you to pass assets to a surviving spouse without incurring estate taxes. This can be particularly useful if you are married.

Who pays estate tax in Massachusetts?

In Massachusetts, estate tax is paid by the estate itself, not the beneficiaries. If the total value of the deceased’s estate exceeds the Massachusetts estate tax exemption 2024 of $2 million, the estate must file an estate tax return and pay any taxes owed. Massachusetts estate tax works with a much lower exemption limit compared to federal levels. For 2024, the estate tax rate starts at 0.8% and can go up to 16% for the largest estates. This means that if the estate’s value is above $2 million, only the amount that crosses this threshold is subject to the Massachusetts estate tax.

The estate tax exemption “sunset” for 2026

The Tax Cuts and Jobs Act of 2017 made big changes to tax rules, including doubling the federal estate, gift, and generation-skipping transfer (GST) tax exemption. This exemption went from $5,490,000 in 2017 to $11,180,000 in 2018. Due to inflation, the 2024 estate tax exemption increased to $13,610,000. However, starting January 1, 2026, this exemption is set to sunset to $5,000,000, adjusted for inflation (which would be about $7,000,000). This change will happen unless Congress decides to make new adjustments before then. So if you were googling "estate tax exemption sunset 2026," there's your answer.

What is the difference between inheritance tax and estate tax?

Estate tax vs inheritance tax refers to two different types of taxes related to inheritance. Death tax (estate tax), is paid by the estate of the deceased before any assets are distributed to heirs. This tax is based on the total value of the estate. Inheritance tax, on the other hand, is paid by the beneficiaries who receive the inheritance. This tax is based on the value of the inheritance each person receives and their relationship to the deceased. Unlike estate tax, inheritance tax rates and exemptions vary by state. Some states impose inheritance taxes, while others do not.

Infographic entitled Estate Tax vs Inheritance Tax showing the difference between the taxes.

Form 706 vs 1041

Understanding the difference between Form 706 vs 1041 is crucial for managing estate taxes. Here’s a simple breakdown of how these forms work: Form 706 is used for estate tax reporting. It calculates the federal estate tax that the estate owes if its value exceeds the federal estate tax exemption. This form details the total value of the estate, including assets like real estate, stocks, and personal property. Filing Form 706 ensures that any estate tax due is properly reported and paid. Form 1041 is used for filing the estate income tax return. This form is needed when the estate earns income after the person has died, such as interest, dividends, or rental income. Form 1041 reports this income and ensures that the estate pays taxes on it. Knowing how to deal with estate taxes is important for every taxpayer. Keeping up-to-date with the 2024 estate tax exemption can be a lot easier if you have FlyFin’s expert tax pros on your side.

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