What is the Federal Estate Tax?

The Federal Estate Tax is a Tax on Transferring Property After Death

U.S. Federal Estate Tax Return.

While the federal estate tax was initially repealed as of January 1, 2010, on December 17, 2010 it was resurrected and applied retroactively back to January 1. The federal estate tax is collected on the transfer of a person's assets to his or her loved ones after death, and the total tax due is calculated by adding up the fair market values of all of the decedent's assets on the date of death and then applying estate tax credits and subtracting out allowable estate tax deductions.

Who Is Subject to the Federal Estate Tax?

The estates of each and every U.S. citizen are subject to the federal estate tax, but not every estate actually has to pay the tax. Why? Because the Internal Revenue Code gives each U.S. citizen a "coupon" that can be applied against their estate tax bill. In 2009 the "coupon" was $3,500,000, for 2010 and 2011 the "coupon" was $5,000,000, in 2012 the "coupon" was $5,120,000, in 2013 the "coupon" was $5,250,000, and in 2014 the "coupon" is $5,340,000. Thus, in 2014 if the value of the net estate - meaning the gross estate reduced by allowable estate tax credits and deductions - does not exceed $5,340,000, then the estate will pass to the heirs free from federal estate taxes.

Note that under the provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRUIRJCA" for short), the $5,000,000 estate tax exemption, which was indexed for inflation for 2012 to $5,120,000, and 35% estate tax rate were only scheduled to be in effect until December 31, 2012, at which time the federal estate tax laws were supposed to revert back to the laws that were in effect in 2001/2002.

This meant that on January 1, 2013, the federal estate tax exemption was supposed to drop all the way down to $1,000,000 and the estate tax rate was supposed to jump up to 55%. Nonetheless, Congress and President Obama acted in the early days of 2013 to pass the American Taxpayer Relief Act ("ATRA" for short) which has made the changes to the rules governing estate taxes, gift taxes and generation skipping transfer taxes implemented under TRUIRJCA permanent for 2013 and future years.

This means that portability of the estate tax exemption between married couples, which was introduced for the first time under TRUIRJCA, has also been made permanent under ATRA.

And aside from federal estate taxes, many states collect state estate taxes and/or inheritance taxes:

State Estate Tax and Exemption Chart

Only six states currently collect a state inheritance tax, which is completely different from an estate tax since it is assessed against who actually receives the deceased person's property, not on the overall value of the deceased person's property. Note that Maryland and New Jersey are the only two states that collect both state estate taxes and state inheritance taxes:

State Inheritance Tax Chart

What Happens if an Estate is Taxable?

What happens if the gross estate exceeds the federal estate tax exemption (or estate tax "coupon") for the year of the decedent's death? Then the estate will have to file a federal estate tax return, called Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. For 2014, Form 706 must be filed with the IRS within nine months of the decedent's date of death. And when is the estate tax payment due? At the same time the Form 706 is due, although an automatic extension can be applied for using Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, but the payment itself cannot be delayed without accruing interest.

For historical changes to the federal estate tax exemption and rate, refer to the following: