Exemptions From Estate Taxes

Estate Tax Definition and the Exemption

U.S. Federal Estate Tax Return. Credit: www.irs.gov

An exemption from estate taxes -- sometimes called the estate tax exclusion -- is an amount excluded or subtracted from an estate's gross value for purposes of calculating the tax owed at the federal level.

Here's an example: 

The federal estate tax exemption is $5.49 million as of 2017. If your gross estate is valued at $5.55 million, it would pay the tax at a top rate of 40 percent on the $100,000 difference between the exemption and the value of the estate -- potentially $40,000.

If your estate is valued at $5.48 million, it will not owe a tax. 

The Exemption Is Indexed for Inflation 

The American Taxpayer Relief Act of 2012 permanently indexed the exemption for inflation so it increases periodically to keep pace with the economy. Prior to ATRA, Congress revisited the issue of raising the exemption amount on a year-by-year basis. Now it's a legislative given that the exemption will increase if inflation demands it. 

The federal estate tax exemption was $5 million in 2010 and 2011. It increased to $5.12 million in 2012, $5.25 million in 2013 and $5.34 million in 2014. It went up again in 2015 to $5.43 million before reaching the $5.45 million mark in 2016. 

It's estimated that only two out of every 100,000 estates have to deal with paying an estate tax because of these significant thresholds. In addition to the exemption, property passing directly to a spouse or a charitable organization is not taxed.

These bequests can be subtracted before determining the value of a taxable estate and applying the exemption. 

Below are links that show the amount of the federal estate tax exemption from 1916 through 2015:

Chart Showing Federal Estate Tax Exemption: 1916 - 1997
Chart Showing Federal Estate Tax Exemption: 1997 - 2017

Portability of the Exemption 

The federal exemption was made "portable" between married couples in 2011. Each spouse is entitled to an exemption from federal estate taxes. Heirs of the first spouse to die can transfer his exemption or any unused portion of the exemption to the surviving spouse. The first spouse's estate must file a federal estate tax return regardless of whether any tax is actually due so the surviving spouse can claim the entire exemption or the unused portion. See What is Portability of the Estate Tax Exemption? for more information about this option. 

State-Level Estate Taxes 

Fifteen states and the District of Columbia additionally impose state-level estate taxes as of 2015. Most of these states exclude an exemption amount from calculating the tax bill, but some do not. Check with your state taxing authority or a local accountant or attorney to be sure.

NOTE: State and local laws change frequently and the above information may not reflect the most recent changes. Please consult with an accountant or an attorney for the most up-to-date advice. The information contained in this article is not legal or tax advice and it is not a substitute for legal or tax advice.