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Most families will never encounter the estate tax.
The estate tax is a tax charged on very large inheritances. While it is somewhat controversial, the estate tax has been a part of US tax law on and off since 1797. Below, find out if this tax will impact you on Tax Day 2020.
What is estate tax?
The current estate tax became law in 2010. Then, in 2018, the estate tax exemption - the amount exempt from estate tax - roughly doubled. Because of the new exemption rates, it's estimated that fewer than 2,000 households will pay any estate taxes in the entire US this year. That's compared to about 52,000 estates that paid the tax in 2000.
The nonpartisan Center on Budget and Policy Priorities reports that fewer than 1 in 1,000 estates pay any federal estate tax.
According to the IRS, individuals can inherit up to $11.4 million tax-free for estates where the decedent died in 2019. This is $11.4 million per person. That means a married couple could receive $22.8 million before any taxes would kick in. There is generally no estate tax for anything left to a married spouse.
At present, 18 states and the District of Columbia have their own estate or inheritance taxes, according to the nonpartisan Tax Foundation.
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Arguments for and against the estate tax
The estate tax has a turbulent history and has been a long-time focus of politicians on both sides of the aisle. The estate tax is so controversial that it actually went away for a period of time: Rates went so low that they were effectively eliminated in 2010. The tax was brought back in 2011 and changed significantly in 2017.
Opponents of the estate tax call it a "death tax." These people argue that income was already taxed when earned so, if left to the deceased's children, other relatives, or charitable causes, they shouldn't have to pay additional taxes.
On the other side of the debate, proponents argue that this is a fair and reasonable tax when money changes hands. Just as you most likely pay taxes when you are paid by an employer, receive a large gift, or buy something at a cash register, you should have to pay taxes when receiving a significant inheritance, they say.
How the federal estate tax works
The current status quo allows for inheritances of well over $10 million without any federal estate taxes. For estates with less than $11.4 million in assets, you don't even have to file an estate tax return form with the IRS.
The tax is based on the gross assets of an estate. That isn't limited to just cash, stocks, and investments. If the estate includes real estate, business interests, or other assets, they are included in the total value for tax purposes.
If an estate exceeds $11.4 million, the IRS requires the estate to file form 706 within nine months after the date of death of a family member, to determine any taxes owed.
Once the personal exemption is used up, the estate tax rate ranges from 18% to a top rate of 40%. This is a progressive tax, which means you pay a higher rate per dollar as the estate size increases.
If your estate is big enough for taxes, you should consider hiring an expert
If a family member's estate may be taxable, you should seriously consider hiring a tax professional and a financial adviser to help you manage the process and what comes next.
Estate taxes don't impact many US households, but when they do, the costs can add up fast.
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