The government imposes gift and estate taxes on transfers of wealth during an individual's life and at his or her death. At the federal level, the Internal Revenue Code governs gift and estate taxes, while individual state tax codes codify state estate tax laws.
The federal estate tax is set forth beginning in Section 2001 of the Internal Revenue Code (26 U.S.C. § 2001). Estate taxes are imposed at the time of the estate holder's death. A person's taxable estate consists of all property owned by the estate holder at death, known as the "gross estate," subtracting allowable deductions. The gross estate may include real estate, stocks, bonds, business interests, and personal property. If the estate holder left a surviving spouse, the spouse's share of the property will be deducted from the gross estate. Deductions will also be taken from the gross estate for the estate holder's funeral expenses, debts owed at the time of death, and property devised to a tax-exempt charity.
Estate Tax Deductions
3Mortgages and debt
5Losses during estate administration
Estate Tax Exemption
For the year 2023, estates worth less than $12.92 million are not liable for federal estate tax.
Under the Economic Growth and Tax Relief Reconciliation Act of 2001, a certain portion of the taxable estate is also exempt from estate taxes. The exemption amount for 2023 is $12.92 million. Accordingly, estates worth less than $12.92 million are not liable for any estate taxes. For larger estates, however, the value of the estate over $12.92 million is taxed at a top marginal rate of 40 percent.
The federal gift tax is set forth beginning in Section 2501 of the Internal Revenue Code (26 U.S.C. § 2501). Gift taxes are imposed on money or property transferred gratuitously by a donor to another individual or non-charitable organization during the donor's life. Not all gifts are subject to the gift tax. Typically, it is not applied to gifts between spouses and gifts made to qualified charities. Additionally, the federal gift tax exclusion allows a donor to give up to a certain amount in gifts each year without paying gift taxes. In 2023, this annual exclusion is $17,000. It applies to each person to whom a gift is made. Thus, a donor may give any number of people up to $17,000 apiece without filing a gift tax return.
A number of states impose estate taxes, often called "inheritance taxes," on estates that are not large enough to owe federal estate taxes. Like federal estate taxes, property left to a surviving spouse or to a tax-exempt charity may be exempt from state estate taxes.
Recipients of an inter vivos gift or a decedent's estate are not liable for gift or estate taxes on that property. Additionally, since property received by gift or inheritance need not be included in income, a recipient is not required to pay income tax on the value of the gift or inheritance received.
Many individuals engage in estate planning before death in an effort to reduce or avoid substantial estate taxes. The most popular estate planning tool is the trust. Funds placed in a trust are not owned by the estate holder at death and are therefore not subject to the estate tax.