How to Calculate Your Estate Tax Liability
Gross Estate Reduced by Debts and Expenses Equals Net Taxable Estate
If your death occurs during a year when the federal estate tax is in effect, then whether your estate will be liable for federal estate taxes will depend on the value of your gross estate, the amount of debt you owe at the time of your death, the total expenses that will be incurred while settling your estate, and any deductions that your estate can take. Here is how to figure out an estimate of your estate tax liability.
For an overview of current federal estate tax laws and a chart showing the amount of the federal estate tax exemption and estate tax rates from 1997 through 2014, see the following:
This information is presented in a simplified format so that you can calculate a rough estimate of your estate tax liability. It should not be relied on for legal or tax advice.
Determine the Value of Your Net Estate
The value of your gross estate is what is used as the starting point for determining your estate tax liability. Learn how to calculate an estimate of the value of your gross estate by reading:
- What Value of an Asset is Used for Estate Tax Purposes?
- How to Calculate the Value of Your Gross Estate
From your gross estate the following can then be subtracted to give you the value of your net estate for estate tax purposes:
- Debts and expenses, including mortgages, lines of credit, personal loans, credit card debt, funeral expenses and medical bills; as well as administrative expenses to settle your estate or Revocable Living Trust, including attorney, accounting and appraisal fees, storage and shipping fees, insurances, and court fees; (Tip: To get a rough estimate of the administrative expenses, multiply your gross estate by 5%);
- Charitable transfers, including direct gifts and property, set aside in a Charitable Remainder Trust or Charitable Lead Trust; and
- Transfers to a spouse who is a U.S. citizen, including outright transfers by right of survivorship and transfers made to a trust that qualifies for the unlimited marital deduction, such as the "A Trust" established when using AB Trust planning or ABC Trust planning.
Determine Your Federal Estate Tax Liability
From your net estate is then subtracted your available federal estate tax exemption to arrive at your taxable estate. The federal estate tax exemption for the 2010 and 2011 tax years was $5,000,000, the exemption for the 2012 tax year was $5,120,000, the exemption for 2013 was $5,250,000, and it has increased to $5,340,000 in 2014. The exemption will continue to be indexed for inflation in 2015 and later years.
Also note that if you've made any taxable gifts during your lifetime, then your available estate tax exemption will be equal to the difference between the total exemption available and the value of the lifetime gifts made.
Here are some examples that should help you to understand how an estate tax bill is calculated:
- Death in 2014, no lifetime gifts, taxable estate - If you die in 2014 and your gross estate is $6,000,000 and your allowable debts, expenses and deductions are $500,000, then your net estate is $5,500,000. You then subtract from your net estate your available estate tax exemption to arrive at your taxable estate. If you have not made any taxable gifts during your lifetime, then in this example your taxable estate will equal $250,000:
$5,500,000 net estate - $5,340,000 estate tax exemption = $160,000 taxable estate
Your taxable estate is then multiplied by 40% to arrive at your federal estate tax liability, which in this example equals $64,000:
$160,000 taxable estate x 40% rate = $64,000 tax liability
- Death in 2014, no lifetime gifts, nontaxable estate - Use the same facts above, except that your net estate is valued at $4,000,000. In this case, since your net estate is less than the 2013 estate tax exemption, your taxable estate will be $0 and so your tax liability will be $0:
$4,000,000 net estate - $5,340,000 estate tax exemption = $0 taxable estate
- Death in 2014, $1,000,000 in lifetime gifts - Use the same facts above as in #1, except that your death occurs in 2014 and you made $1,000,000 of taxable gifts during your lifetime. This means that the $1,000,000 in taxable lifetime gifts will be subtracted from your available estate tax exemption, leaving you with a $4,340,000 exemption:
$5,340,000 exemption - $1,000,000 lifetime gifts = $4,340,000 exemption
Thus, your estate tax liability will be $464,000
$5,500,000 net estate - $4,340,000 available exemption = $1,160,000 taxable estate
$1,160,000 taxable estate x 40% rate = $464,000 tax liability