Anyone who expects to leave financial bequests to their heirs after they pass away could potentially have to deal with the federal estate tax. In fact, if you look at the estate tax rates, it looks like they start to apply on estates of any size.
Yet in reality, only a handful of taxpayers ever faces a realistic prospect of having to owe estate tax to the IRS. The reason is that the tax laws offer a tax credit against any prospective estate tax due, and that has the net effect of preventing all but the wealthiest estates from owing a dime of tax. With a big boost last year coming from tax reform, it takes a lot of money to use up your tax credit entirely.
The 2019 estate tax rates
The same 12 brackets for calculating estate tax remain in place for 2019:
For Taxable Estates in This Range
You'll Pay This Base Amount of Tax
Plus This Rate on the Excess Above the Lower End of the Range
$0 to $10,000
$10,000 to $20,000
$20,000 to $40,000
$40,000 to $60,000
$60,000 to $80,000
$80,000 to $100,000
$100,000 to $150,000
$150,000 to $250,000
$250,000 to $500,000
$500,000 to $750,000
$750,000 to $1 million
$1 million and up
As you can see, the chart accounts for even modest estates to pay some tax. For instance, it would appear that a taxable estate of $30,000 would end up with $5,900 in tentative estate tax. A $2 million taxable estate would start to approach the $750,000 mark, and it wouldn't take much more to surpass $1 million in tentative estate taxes.
However, those calculations don't take into account what's known as the unified gift and estate credit. As you'll see below, this tax break makes a huge difference in keeping tens of millions of Americans from ever having even to consider any estate tax liability.
The basics of the unified credit and the lifetime exclusion amount
To calculate the unified credit, you first have to start with another number called the lifetime exclusion amount. That number rises every year for inflation, but it got a huge boost in 2018 due to tax reform. After having doubled last year from 2017 levels, the lifetime exclusion amount picked up another $220,000 this year, coming in at $11.4 million for 2019.
Once you have the lifetime exclusion amount, you can figure out the amount of the unified credit by running it through the brackets above. Doing the math, the 2019 unified credit is $4,505,800, up $88,000 from 2018's levels.
But all of this is more complicated than it has to be from a taxpayer's standpoint. What's important to know is that estates of up to $11.4 million are free of tax, and from that point on, anything additional above that mark gets taxed at 40%.
How to pay less estate tax
If you're wealthy enough that $11.4 million won't be enough to avoid taxes entirely, then there are other things you can do to try to reduce or eliminate your potential estate tax liability:
- Make gifts during your lifetime that are eligible for other tax breaks. Every year, you can make an unlimited number of gifts of up to $15,000 per person to as many individuals as you choose. As long as you stay under that limit, then you won't use up any of your lifetime exemption, but you'll reduce the potential size of your taxable estate.
- Take advantage of unlimited gift opportunities. Gifts to a spouse or charity are generally free of tax regardless of the amount given, and you can make gifts to pay qualifying educational or medical expenses in any amount as long as you pay them directly to the institution itself rather than to the person in school or needing medical attention.
However, in planning your estate, you should be aware that some states have estate taxes of their own. In many cases, those states don't follow the same rules as the federal government, and exemption amounts can be far less than $11.4 million. Check with the state in which you live to get the information you need for your particular situation.
Why planning is still smart
Given how big the lifetime exemption is, it might seem like you wouldn't ever need to worry about doing any planning to avoid the estate tax. Yet given the big changes that have occurred in the estate tax over the years, there's always the potential for further revisions that could subject more taxpayers to potential estate tax liability. Keeping up to date on changes in the estate tax is important, and making sure your planning is current will ensure you pay as little in tax as you can.
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