Federal Estate Tax: What Is It? How Is It Calculated?
Feb 25, 2014
The federal estate tax is set "permanently" for $5,000,000 per person, indexed each year for inflation. "Permanently" means that it is not set to automatically expire, which earlier laws were. Recall December of 2012, when the estate tax was set to "sunset" from $5,000,000 to $1,000,000 per person.
Although no sunset provision currently exists, the permanency of the law is such until the government decides to change it through legislature. There are no current proposals to do so; but it is something to keep in mind, as a part of your ongoing estate planning.
The Federal estate tax rules require that a personal representative of an estate must ?le a federal estate tax return within nine months of a person’s death if that person’s gross estate exceeds the exemption amount for the year of death. Deaths occurring in 2014 have an exemption of $5,340,000. This will continue to increase each year, with the inflation provision. Note that this is for federal purposes. Check with your attorney on any state estate tax rules, specific to your local.
Calculating the estate tax begins with a determination of the decedent’s gross estate. This generally includes all of the decedent’s assets: real estate, personal property, cash and cash equivalents (grain inventories, for example.), his or her share of jointly owned assets and life insurance proceeds from policies owned by the decedent. Once the gross estate is valued, allowable deductions are subtracted. These generally include debts, funeral expenses, legal and administrative fees, and related expenses.
Also, there are unlimited deductions for transfers made to surviving spouses and to charities. The deductions are totaled, and deducted from the gross estate valuation. Finally, once the deductions are accounted for, the net taxable estate is determined by adding in any taxable gifts (made after 1976), if not already included in the gross estate. Recall that taxable gifts are those which exceed the annual gifting allowance in any given year. These are tracked by a gift tax return, filed by the giver, at the time the gift is made.
Once the calculations are made, as described, you arrive at the decedent’s "net taxable estate." If this is over the exemption for the year of death, then the decedent’s estate owes estate tax. The estate tax rate is 40%.
For married couples, the estate tax exemption is $10.68 million (2x $5,340,000.) Included in this is the concept and availability of "portability." Portability is the ability for a surviving spouse to carry over any unused exemption allowance when the first spouse passed away, so long as the surviving spouse filed a Form 706 to claim it within 9 months of the first spouse’s passing.
There is more to detail with portability. . . . stay tuned!