What is estate tax?
Estate tax is a tax on the transfer of property after death. The federal estate tax generally applies when a person’s assets exceed $11.4 million in 2019 and $11.58 million in 2020 at the time of death. The estate tax rate can be up to 40%. Some states also assess estate tax. Property left to a surviving spouse generally isn’t subject to the estate tax.
IRS Form 706 has the details on exactly which assets count in the calculations, how to find their value and how to figure the tax. But in general, you figure the tax by applying the rates below to the amount of the estate that’s subject to tax. You should see a qualified professional if you have questions.
Estate tax rates
|Tax rate||Taxable amount||Tax owed|
|18%||$0 to $10,000||18% of taxable amount|
|20%||$10,001 to $20,000||$1,800 plus 20% of the amount over $10,000|
|22%||$20,001 to $40,000||$3,800 plus 22% of the amount over $20,000|
|24%||$40,001 to $60,000||$8,200 plus 24% of the amount over $40,000|
|26%||$60,001 to $80,000||$13,000 plus 26% of the amount over $60,000|
|28%||$80,001 to $100,000||$18,200 plus 28% of the amount over $80,000|
|30%||$100,001 to $150,000||$23,800 plus 30% of the amount over $100,000|
|32%||$150,001 to $250,000||$38,800 plus 32% of the amount over $150,000|
|34%||$250,001 to $500,000||$70,800 plus 34% of the amount over $250,000|
|37%||$500,001 to $750,000||$155,800 plus 37% of the amount over $500,000|
|39%||$750,001 to $1,000,000||$248,300 plus 39% of the amount over $750,000|
|40%||$1,000,001 and up||$345,800 plus 40% of the amount over $1,000,000|
A handful of states also impose estate taxes at various income thresholds.
Which states have an estate tax?
For 2019, 13 states and the District of Columbia have an estate tax. Many have lower asset thresholds than the federal government. Each state’s exclusion amount is in the table below.
If you live in a state with an estate tax, the good news is that (generally speaking) your estate tax bill is subtracted from the value of your taxable estate before you calculate what you might owe the IRS.
Assets excluded from state estate tax
|District of Columbia||$5.682 million|
|New York||$5.74 million|
|Rhode Island||$1.562 million|
The difference between estate tax and inheritance tax
A few states impose inheritance taxes, which are different in that they are paid by heirs rather than by the deceased’s estate.
- Six states have an inheritance tax, and one collects both estate and inheritance taxes.
- Inheritance tax rates often depend on the heir’s relationship to the deceased. A surviving spouse is exempt from inheritance tax in all states. Some states tax a deceased person’s children, but at a low rate. More distant relatives or heirs who aren’t related to the deceased usually face the highest inheritance tax rates.
How to reduce estate taxes
If you want to reduce your estate taxes before you die, there are some tactics you might use to protect your property. They include:
- Spending your assets. If you’re not afraid of running out of money before you die, enjoy your wealth.
- Spreading your assets. You could give away part of your estate as gifts to loved ones while you’re still around. Many states don’t tax gifts. (Learn how the gift tax works.)
- Giving away your assets. If you leave property to a qualifying charity, it is deductible from the gross estate.
- Shielding your assets in a trust. Properly created irrevocable or bypass trusts could provide a way to legally shelter some of your assets from state and federal estate tax.
- Moving to a more favorable tax environment. Since most states don’t have estate tax or inheritance tax, you have many relocation options.
- For more on transferring your assets wisely, see our estate planning checklist.
If you’re inheriting or bequeathing something, watch out for capital gains tax
- Even if an inheritance isn’t taxed when your heirs receive it, any subsequent earnings or income that it produces may be considered taxable capital gains at the federal and state levels.
- If your heirs sell an asset they inherited, any profit could be taxed at the federal level as either a long-term or short-term capital gain, depending on when they dispose of the property.
- If you do give your heirs a bequest, especially a sizable one, it’s a good idea for them to talk with a professional who specializes in estate taxes about the best ways to minimize any potential tax bite.