Federal Estate Tax Exemption and Rates: 2000-2018

The History of the Federal Estate Tax Exemption

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The Internal Revenue Service taxes the transfer of virtually all property from one taxpayer to another. If you're feeling particularly generous during your lifetime, a gift tax may come due. The estate tax covers property that's transferred to a new owner or beneficiary when you die. The federal estate tax has been around in some shape or form since 1916, but a good deal of property is exempt. 

How Is the Federal Estate Tax Calculated?

The estate tax is calculated on the value of your gross estate—what's left after mortgages, other debts, and the administrative costs of settling your estate are paid. You can also deduct money or property you give to charities, and you can subtract the value of any property that goes to your spouse because bequests made to a spouse aren't subject to an estate tax. 

Taxable Estate vs. Probate Estate 

Your taxable estate is not necessarily your probate estate—these are two separate things. Your probate estate is comprised only of assets that require the probate process to transfer to a living beneficiary. Your taxable estate is everything you own or have an ownership interest in, regardless of how it transfers. 

For example, assets that pass directly to a named beneficiary, such as life insurance proceeds, payable-on-death bank accounts, and retirement funds, don't require probate so they're not part of your probate estate. But they do contribute to the value of your estate for estate tax purposes.

Estate Tax vs. Inheritance Tax 

An estate tax is not the same as the inheritance tax, although both are individually and collectively known as "death taxes." An inheritance tax is imposed on the value of a single bequest and is typically payable by the beneficiary, whereas an estate tax is based on the value of the entire estate after all those permissible deductions are made. The estate tax is payable by the estate.

So is a bequest taxed twice, once as a component of the value of the estate and again when it transfers to the beneficiary? Yes and no. The federal government does not impose an inheritance tax, so transfers can only be taxed once at the federal level. But some states have an inheritance tax, so a bequest might be taxed twice in these locations—once at the federal level for an estate tax and again at the state level for an inheritance tax.

The Estate Tax Exemption

The estate tax exemption is the most important deduction you can take from the gross value of your estate. In fact, very few estates end up owing an estate tax because of this exemption. Only two of every 1,000 estates owed this tax in 2017 because the 2017 estate tax exemption was $5.49 million.

The exemption increased a significant $11.18 million in 2018 thanks to the Tax Cuts and Jobs Act, so it can be expected that even fewer estates will owe this tax going forward. 

Only the balance of the value of an estate over the threshold is taxable—after all other deductions are made. If your net estate is worth $11 million in 2018, it will not owe estate taxes. If it's $12 million, it will owe an estate tax on the $820,000 difference. 

The American Taxpayer Relief Act of 2012 indexed the exemption for inflation, so it increases a little from year to year. Here's how the exemption has broken down in the millennium.  

Historical Federal Estate Tax Exemptions and Rates: 2000 - 2018

Year Estate Tax Exemption Top Estate Tax Rate
1916 $50,000 10%
2000 $675,000 55%
2001 $675,000 55%
2002 $1,000,000 50%
2003 $1,000,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 $5,000,000 or $0 35% or 0%
2011 $5,000,000 35%
2012 $5,120,000 35%
2013 $5,250,000 40%
2014 $5,340,000 40%
2015 $5,430,000 40%
2016 $5,450,000 40%
2017 $5,490,000 40%
2018 $11,180,000 40%

Contrast today's top estate rate and exemption to what they were back in 1916, the estate tax's inaugural year. The exemption has increased by $11.13 million.

Estates were given a choice in 2010—they could use the $5 million estate tax exemption and pay 35 percent on the balance of the value of the estate over this amount, or they could claim no exemption and pay the 0 percent rate. It sounds like a bit of a no-brainer, but complicated carry-over rules were involved, negating the stepped-up value beneficiaries normally receive, so the question wasn't as simple as it appears on the surface. 

State-Level Estate Taxes

Twelve states and the District of Columbia impose their own estate taxes and offer their own exemptions as of 2018. Even estates that that dodge the federal tax might owe state-level taxes because state exemptions tend to be significantly lower. But one state—Hawaii—offers an exemption equal to that of the federal government, as does the District of Columbia. 

Tax rates are less significant, however. Washington State lays claim to the highest estate tax rate of 20 percent as of 2018. Eight states and the District of Columbia have a top estate tax rate of 16 percent.

Tennessee, New Jersey, and Delaware have all repealed their estate taxes as of 2018. 

NOTE: State and federal tax laws can change frequently and the above information may not reflect the most recent changes. Please consult with an attorney or an accountant 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.